Jeff Cornwall posts today on the momentum that seems to be growing for VAT taxes in the U.S. Jeff points out some issues with VAT taxes, esp. relative to the burden that VAT taxes place on business for additional compliance and reporting costs. From the perspective of small business and entrepreneurial business, VAT taxes are highly problematic due to the disproportional cost impact of compliance activities. Yet another additional burden that will suppress job growth and entrepreneurial activity.
There's another aspect of VAT taxes that should frighten us all relative to their imposition. I strongly believe that one reason political elites like VAT taxes is that VAT is almost invisible. It gets baked into the cost of all goods, so the consumer never really is aware of the amount of VAT that is included in everything that they purchase. In this sense, it's even more invisible than a standard sales tax, which is added at the cash register on top of the shelf or list price of goods. VAT on the other hand is included in the list price.
Having lived in Europe for a time during the 90s, what I recall is that as an American I was generally aware of the fact that prices for most things seemed higher than we would pay in the States, but locals generally did not have that perspective in their day-to-day shopping. Now, Europeans were certainly aware of the cost differences in a general sense, hence the fact that any Europeans visiting the U.S. would stock up on all sorts of clothes and other products when they were here. But to a much greater degree than a sales tax or income tax the VAT becomes invisible. The same relative degree of increase in VAT will not generate the same degree of awareness or opposition as an increase in income taxes.
This insidious aspect of VAT is something we should all worry about before signing off on adding a VAT to the tax mix in the U.S. Personally, I think we'd all be better off if all taxes were very visible and in our faces whenever we pay them. For example, gas pumps should be forced to display clearly every tax that's baked into the price of a gallon of gasoline. Every tax should be as visible to us as our income taxes are on the bottom of the form 1040 every April 15. It should be an integral part of being an informed citizen, instead of cattle for the political and corporate elite to bamboozle from Washington.
On the other hand, a VAT is a consumption tax instead of an income tax, so it is less burdensome on those who invest and save vs. those who consume. In that sense, many feel a VAT is more "fair" (whatever the heck that somewhat slippery term means). Personally, I'd prefer that at least some degree of the tax burden in the U.S. be shifted to consumption taxes and away from income taxes. But I'd also strongly prefer that to be part of a much larger rethink of the tax code in the U.S. that moves away from today's massively complex, loop-hole and preference ridden disaster of a tax code and toward a clean, flat-tax based income tax code possibly combined with some form of consumption tax. If done right that could and should result in less compliance costs for all businesses, less bias in the tax code against small business and entrepreneurs, and lots of productive resource freed up from tax-related administrivia, game playing, and rent-seeking. Odds of this happening seem vanishingly small, but it's good to have dreams.
UPDATED - to expand and clarify some of my original points