Benjamin A. Neil (2010), “VAT: The Elixir for America’s Economic Ills?”, Journal of Finance and Accountancy, volume 3: 1-9. [The journal has withdrawn this manuscript from publication]
Link to original article: http://web.archive.org/web/20101119095053/http://aabri.com/manuscripts/10437.pdf
Neil,
page 1
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Compare
to:
Daniel
Mitchell (2005)
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ABSTRACT
America
is one of the few nations without a value-added tax (VAT), but there is
growing pressure to impose the language. In simple terms, a VAT is a type of
national sales tax. However, instead of being collected at the cash register,
it is imposed on the “value added” at each stage of the production process.
Some like the VAT because it offers a new way to finance bigger government.
Others like the VAT because – at least, compared to the income tax – it does
not impose as much damage on the economy. Supporters of limited government
oppose the tax because it makes it easier for politicians to expend the size
of government.
|
America is one of
the few nations without a value-added tax (VAT), but there is growing
pressure to impose the levy. In simple terms, a VAT is a type of national
sales tax. However, instead of being collected at the cash register, it is
imposed on the “value added” at each stage of the production process.
Some like the VAT
because it offers a new way to finance bigger government. Others like the VAT
because—at least compared to the income tax—it does not impose as much damage
on the economy. …
… Supporters of
limited government oppose the tax because it makes it easier for politicians
to expand the size of government. By contrast, some on the left oppose the
VAT because of its one redeeming feature—it is a consumption-based levy and
therefore not as easy to use for economically destructive income
redistribution.
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Neil, page 2
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Ron
Smith (2009)
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BACKGROUND
The
biggest question facing all of us right now - not to mention our children,
their children and all those yet unborn – is how in the world we are going to
get out from under the mountain of debt that we have piled up over the years.
We owe, as a nation, trillions. Using generally accepted accounting standards
that consider our gigantic unfunded liabilities, the national debt is several
times that. We can no longer count on the people of other nations to lend us
money that they now know will never be repaid in other than nominal ways,
with vastly cheapened dollars.
|
The biggest question
facing all of us right now - not to mention our children, their children and
all those yet unborn - is how in the world we're going to get out from under
the mountains of debt that we have piled up over the years. We owe, as a
nation, somewhere in the neighborhood of $11 trillion, and that is a
conservative figure. Using generally accepted accounting standards
that consider our gigantic unfunded liabilities, the national debt is several
times that. We can no longer count on the people of other nations to lend us
money that they now know will never be repaid in other than nominal ways,
i.e., with vastly cheapened dollars.
|
Neil,
page 2
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Ron
Smith (2009)
[note
that Neil does refer to the Smith source, but does not indicate when he is
quoting directly from it]
|
Since
it is difficult to believe that the federal government can actually operate
with trillions of dollars for a budget and budget deficit, we see our nervous
political class entertaining something so drastic; it has been off the table
in this country for many years – even though more than a hundred governments
use it to pay for their ever-growing spending. I am talking about a
value-added tax, commonly referred to as VAT. (Smith, 2009)
|
Since it's difficult
to believe that the federal government can actually operate with a $3.6
trillion budget and a $2 trillion deficit, we see our nervous political class
entertaining something so drastic, it has been off the table in this country
for many years - even though more than a hundred other governments use it to
pay for their ever-growing spending. I'm talking about a value-added tax,
commonly referred to as a VAT.
|
Neil,
pages 2-3
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Rampel
(2009)
|
Colonial
America may have actually been the setting for the conceptual foundation of
the modern VAT. One approach from 1921 by Thomas S. Adams, suggested
replacing existing business taxes with a VAT. (Adams,1921)). Other champions
of this consumption tax included Gerhard Colin and Paul Studenski, in the
1930’s and 1940’s. VAT received attention again in the 1980’s. Charles
McLure, who worked in the Reagan Administration as Deputy Assistant Secretary
of the Treasury for tax analysis, proposed a VAT as the “key to deficit
reduction” in 1987.(McLure,1987) So why hasn’t a VAT actually materialized
the United States, despite its ambiguity beyond our shores? Politics mostly –
back in 1988, Lawrence Summers – now President Obama’s chief economic adviser
– explained with an observant quip, “Liberals think it is regressive and
conservatives think it is a money machine.”(Rosen,1988)
|
Colonial America may have actually been the setting for the
conceptual foundation of the modern VAT, according to one paper.
This article, published as part of
the Tax History Project, explains one approach from 1921 by Thomas S. Adams,
who suggested replacing existing business taxes with a VAT. Other champions
of this consumption tax included Gerhard Colm and Paul Studenski in the 1930s
and 1940s.
VATs received attention again in the 1980s. Charles McLure, who worked in the Reagan administration as deputy
assistant secretary of the Treasury for tax analysis (and in that capacity
helped create the basis for the Tax Reform Act of 1986), proposed a VAT as
the “key to deficit reduction” in 1987.
So why hasn’t a VAT actually materialized in the United
States, despite its ubiquity beyond our shores?
Politics, mostly. Back in 1988, Lawrence Summers — now
President Obama’s chief economic adviser — explained this with an observant quip: “Liberals think it’s
regressive and conservatives think it’s a money machine.”
|
Neil,
page 3
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Erb
(2009)
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As of
the morning of December 14, 2009, the national debt of the United States was
$12.1 trillion dollars. To put it into context, if you counted one ($1.00)
Dollar every second of every minute, you would have to count for 383,434
years to reach $12.1 trillion dollars. Policy arguments aside, the most
daunting obstacle to the VAT is the 67,204 page federal tax code. The
implementation of a VAT would require a complete overhaul of the existing
federal tax code, something our Congress has been loath to do. There has been
little in the way of major reform in more than twenty (20) years. In
contrast, almost every modern nation which as adopted the VAT has made
significant changes to their existing income tax systems.
|
As of this morning, the national debt of the US is $12.1 trillion. To put that into
context, if you counted $1 every second of every minute, you would have to
count for 383,434 years to reach $12.1 trillion.
… Policy arguments aside, the most daunting obstacle to the
VAT is the 67,204-page federal tax code. The implementation of a VAT would
require a complete overhaul of the existing federal tax code, something our
Congress has been loathe to do. There's been little in the way of major
reform in more than 20 years. In contrast, almost every modern nation which
has adopted the VAT has made significant changes to their existing income tax
systems.
|
Neil,
page 3
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Erb
(2009)
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Economists
and politicians differ on what changes to the tax code would make the most
sense if the federal government adopted a VAT. The argument instead would
focus on burden- shifting. In other words, instead of “can we replace the
income tax with a VAT?”, the real question is, “which components of the
income tax would be replaced by the VAT?”.
|
Economists and politicians differ on what changes to the tax
code would make the most sense if the federal government adopted a VAT. … The
argument instead would focus on burden-shifting. In other words, instead of
"can we replace the income tax with a VAT?" the real question is,
"which components of the income tax would be replaced by the VAT?"
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Neil,
page 3
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Bartlett
(2009)
http://www.forbes.com/2009/10/22/republicans-value-added-tax-opinions-columnists-bruce-bartlett.html
[note
that source is mentioned at the end of one sentence, but Neil does not
indicate when he is quoting from this source]
|
In the
early 1980’s, practically every leading conservative economist supported a
VAT for the United States. Norman True, one of the godfathers of supply-side
economics, and Murray Weidenbaum, Chairman of the Council of Economic
Advisers, under Ronald Reagan, wrote many articles, books and papers
supporting the VAT. Back in 1992, former California Governor Jerry Brown
proposed a VAT plus a flat rate income tax that was widely hailed by supply-side
economists such as Arthur Laffer and Gary Robbins. More recently, Senator Jim
DeMint, R. S.C., introduced legislation (s. 1240) to establish a business
consumption tax, that is, in essence, a VAT. (Bartlett, 2009).
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Back in the early 1980s,
practically every leading conservative economist supported a VAT for the
United States. Norman Ture, one of the godfathers of supply-side economics,
and Murray Weidenbaum, chairman of the Council of Economic Advisers under
Ronald Reagan, wrote many articles, books and papers supporting the VAT. …
Back in 1992, former California Gov. Jerry Brown proposed a VAT plus a flat
rate income tax and this was widely hailed by supply-side economists such as
Arthur Laffer and Gary Robbins. More recently, Sen. Jim DeMint, R-S.C.,
introduced legislation (S. 1240) to establish a business consumption tax that
is, in essence, a VAT.
|
Neil,
page 3
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Greg
Makiw (2009)
|
From a
strictly economic standpoint, a VAT is great. It is essentially a flat
consumption tax, like the so-called Fairtax, but implemented in a way to
reduce compliance problems. If you look at the economic effects, a VAT is
similar to the Hall-Rabushka Flat Tax, which many economists love.
Essentially, the main difference between a VAT and the flat tax as developed
by Hall and Rabushka is that firms get to deduct wages as a cost under a flat
tax, but then those wages are taxed at the household level.
|
From a strictly economic standpoint, a VAT is great. It is
essentially a flat consumption tax, like the so-called FairTax, but
implemented in a way to reduce compliance problems. …. If you look at the
economic effects, a VAT is similar to the Hall-Rabushka Flat Tax, which many
economists love. Essentially, the main difference between a VAT and the flat
tax as developed by Hall and Rabushka is that firms get to deduct wages as a
cost under a flat tax, but then those wages are taxed at the household level.
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Neil, pages 3-4
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Mulligan
(1996)
|
Hall
and Rabushka explain that our current tax system has two problems – two
problems that might be solved with their flat tax. First, the current system
is very complicated. The complications lead to the emergence of specialists
such as tax accountants and lawyers who devote their careers to help the rest
of us understand and comply with the tax code.
A
second problem with the current income tax system is its high “marginal” tax
rates, the rates at which people pay taxes as their taxable incomes grew. The
high marginal rates greatly discourage work, saving, entrepreneurial effort,
and even honesty.
|
Hall
and Rabushka explain that our current tax system has two problems - two
problems that might be solved with their flat tax. First, the current system
is very complicated. The complications lead to the emergence of specialists
such as tax accountants and lawyers who devote their careers to help the rest
of us understand and comply with the tax code.
… A
second problem with the current income tax system is its high
"marginal" tax rates, the rates at which people pay taxes as their
taxable incomes grow. The high marginal rates greatly discourage work,
saving, entrepreneurial effort, and even honesty.
|
Neil,
page 4
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[note
that Neil does mention the Fraser Institute at the end of one sentence, but
does not indicate when he is quoting the source]
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One of
the main, though often overlooked, benefits of Hall-Rabushka is that it
effectively moves income tax away from a tax system based on income towards
one based on consumption. Economists generally agree that the taxation of
consumption is the most effective manner in which to raise tax revenue.
(Fraser Institute, 2009)
|
One of the main, though often
overlooked, benefits of Hall-Rabushka is that it effectively moves income tax
away from a tax system based on income towards one based on consumption.
Economists generally agree that the taxation of consumption is the most
efficient manner in which to raise tax revenue (Jorgensen Yun 1991; Kesselman
1997; and Kneller, Bleaney, and Gemmell 1999).
|
Neil,
page 4
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[Note
that Neil does correctly mention source at the end of one sentence, but does
not indicate when he is quoting directly from Mankiw]
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Why do
some conservatives hate the VAT? For political reasons; they fear it would be
a new tax, hidden from any voters, used to expand government. They fear that
rather than replacing our existing tax system, a VAT would add to it.
(Mankiw, 2009).
|
Why do some conservatives hate the VAT? For political reasons.
They fear it would be a new tax, hidden from many voters, used to expand
government. They fear that rather than replacing our existing tax system, a
VAT would add to it. Indeed, that is precisely what Aaron and Sawhill are
proposing.
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Neil,
pages 4-5
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Montgomery
(2009)
[Note
that correct source does appear to be mentioned at the end of one sentence,
but Neil does not indicate when he is quoting directly form this source]
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At a
White House conference early in 2009, on the government’s budget problems, a
roomful of tax experts pleaded with Treasury Secretary Timothy F. Geitner to
consider a VAT. A recent flurry of books and papers on the subject is
attracting genuine, if furtive, interest in[page break] Congress. And in
April, after wrestling with the White House over the massive deficits
projected under Obama’s policies, the Chairman of the Senate Budget Committee
declared that a VAT should be part of the debate.”There is a growing
awareness of the need for fundamental tax reform,” Senator Kent Conrad
(D-N.D.) said in an interview. “I think a VAT and a high-end income tax have
got to be on the table.”....(Montgomery,2009) “While we do not want to rule
any credible idea in or out as we discuss the way forward with Congress, the
VAT tax, in particular, is popular with academics but highly controversial
with policymakers,” said Kenneth Baer, a spokesman for the White House Budget
Director Peter Orszag. Still, Orszag has hired a prominent VAT advocate to
advise him on health care: Ezekiel Emanuel, brother of the White House Chief
of Staff Rabin Emanuel and author of the book “Health Care
Guarantee.”(Batallas,2009)
|
At a White House
conference earlier this year on the government's budget problems, a roomful
of tax experts pleaded with Treasury Secretary Timothy F. Geithner to
consider a VAT. A recent flurry of books and papers on the subject is
attracting genuine, if furtive, interest in Congress. And last month, after
wrestling with the White House over the massive deficits projected under
Obama's policies, the chairman of the Senate Budget Committee declared that a
VAT should be part of the debate.
"There is a
growing awareness of the need for fundamental tax reform," Sen. Kent
Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end
income tax have got to be on the table."
…
A White House official
said a VAT is "unlikely to be in the mix" as a means to pay for
health-care reform. "While we do not want to rule any credible idea in
or out as we discuss the way forward with Congress, the VAT tax, in
particular, is popular with academics but highly controversial with
policymakers," said Kenneth Baer, a spokesman for White House Budget
Director Peter Orszag.
Still, Orszag has
hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel,
brother of White House chief of staff Rahm Emanuel and author of the 2008
book "Health Care, Guaranteed."
|
Neil,
page 5
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Montgomery
(2009)
[Note
that correct source does appear to be mentioned at the end of one sentence,
but Neil does not indicate when he is quoting directly form this source]
|
The
surge of interest in a VAT is testament to the extraordinary depth of the
nation’s money troubles. While some conservatives have long argued that a
consumption tax would provide a simpler and more efficient alternative to the
byzantine U.S. income tax code, this time, it’s all about the money.
(Montgomery2009).
|
The surge of interest
in a VAT is testament to the extraordinary depth of the nation's money
troubles. While some conservatives have long argued that a consumption tax
would provide a simpler and more efficient alternative to the byzantine U.S.
income tax code, this time it's all about the money.
|
Neil, page 5
|
Sahadi
(2009)
[Note
that correct source does appear to be mentioned at the end of one sentence,
but Neil does not indicate when he is quoting directly form this source]
|
An
increasing number of influential Democrats and fiscal-policy experts have
signaled that lawmakers will have to get a handle on the deficit. And they
recommend seriously considering the creation of a value-added tax (VAT) on
top of the federal income tax. John Podesta, the head of the liberal think
tank, Center for American Progress, who headed President Obama’s transition
team, also raised the issue of a VAT. He noted that the only way to stabilize
the debt situation is to reduce spending, reduce the growth of health care
costs and add new revenue. “As progressives, we need to debate the policy
merits and likelihood of enacting a range of options – including designing a
small and more progressive value-added tax,” Podesta said in a statement.
(Sahadi, 2009)
|
An increasing number of
influential Democrats and fiscal-policy experts have signaled that lawmakers
will have to get a handle on the deficit. And they recommend seriously
considering the creation of a value-added tax (VAT) on top of the federal
income tax.
…
John Podesta, the head of the liberal
think tank Center for American Progress who headed President Obama's
transition team, also raised the issue of a VAT this week. He noted that the
only way to stabilize the debt situation is to reduce spending, reduce the
growth in health care costs and add new revenue.
"As progressives we need to
debate the policy merits and likelihood of enacting a range of options --
including designing a small and more progressive value-added tax, changes to
the corporate tax code, and taxing-upper income earners beyond reversing the
Bush tax cuts," Podesta said in a statement.
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Neil, pages 5-6
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[note
that correct author is given by Neil at the end of one sentence, and he does
introduce this section of his paper by giving credit to Mitchell, but he does
not indicate when he is quoting directly from this author]
|
Daniel
J. Mitchell wrote a piece for the National Review March 1st, 2005 that
explains why a VAT is a terrible idea. The core arguments are just as
relevant today as they were then:
A VAT
might have some theoretically attractive features, but it is a perniciously
effective way of raising revenues and inevitably leads to bigger government.
The best evidence comes from Europe. Back in the mid-1960’s, the burden of
government in Europe was not that much [page break] higher than it was in the
United States. Tax revenues consumed about thirty (30%) percent of gross
domestic product in Europe. The U.S. had a small advantage: The tax burden,
including state and local governments, was about twenty-seven (27%) percent
of G.D.P. But, then European governments starting adopting the VAT. Denmark
was first to do so in 1967. France and Germany followed, with many other
European nations imposing the tax within five (5) years.(See Appendix)
|
A VAT might have some theoretically attractive features, but
it is a perniciously effective way of raising revenues and inevitably leads
to bigger government. The best evidence comes from Europe. Back in the
mid-1960s, the burden of government in Europe wasn’t that much higher than it
was in the United States. Tax revenues consumed about 30 percent of gross
domestic product in Europe. The U.S. had a small advantage: The tax burden,
including state and local governments, was about 27 percent of GDP. But then
European governments started adopting the VAT. Denmark was the first to do so
in 1967. France and Germany followed, with many other European nations
imposing the tax within 5 years.
|
Neil, page 6
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[note
that correct author is given by Neil at the end of one sentence, but he does
not indicate when he is quoting directly from this author]
|
For
politicians, the VAT was great news. Besides being a new source of revenue,
the VAT has been a disturbingly easy tax to increase since it’s built into
the price of products and hidden from consumers. Moreover, even small
increases generate a pile of revenue because the tax base is so broad. The
tax has become so easy to raise that VAT rates in Europe average more than
twenty (20%) percent. For taxpayers, however, the news has been disastrous.
Thanks to this levy, the burden of government in Europe today is much higher
than it is in the U.S. On average, taxes consume about forty-one (41%)
percent of Europe’s economic output. While other taxes have also climbed, the
VAT certainly has helped finance the explosion of social welfare spending
that creates such a drag on European economies.(Mitchell,2005)
|
For politicians, the VAT was great news. Besides being a new
source of revenue, the VAT has been a disturbingly easy tax to increase since
it’s built into the price of products and hidden from consumers. Moreover,
even small increases generate a big pile of revenue because the tax base is
so broad. The tax has become so easy to raise that VAT rates in Europe
average more than 20 percent. For taxpayers, however, the news has been
disastrous. Thanks to this levy, the burden of government in Europe today is
much higher than it is in the U.S. On average, taxes consume about 41 percent
of Europe’s economic output. While other taxes have also climbed, the VAT
certainly has helped finance the explosion of social welfare spending that
creates such a drag on European economies.
|
Neil,
page 6
|
[note
that correct author is given by Neil at the end of one sentence, but he does
not indicate when he is quoting directly from this author]
|
In the
United States, by contrast, the total tax burden as a share of G.D.P is about
where it was forty (40) years ago – twenty-seven (27%) percent. Many European
Governments claimed that more destructive taxes would be reduced or repealed
once the VAT was implemented. In the short term, this was true: As late as
1975, taxes on income and profits were lower in Europe than they were in the
U.S. But, this was a transitory phenomenon. Income tax rates quickly began
climbing and almost immediately jumped above U.S. levels. Ironically, the VAT
facilitates higher tax rates on income since politicians often argued that a
higher VAT had to be accompanied by higher income-tax burdens to ensure the
tax burden was not being shifted to lower-income taxpayers. (Mitchell, 2009)
|
In the U.S., by contrast, the total tax burden as a share of
GDP is about where it was 40 years ago — 27 percent… Many European
governments…claimed that more destructive taxes would be reduced or repealed
once the VAT was implemented. In the short term, this was true: As late as
1975, taxes on income and profits were lower in the EU than they were in the
U.S. But this was a transitory phenomenon. Income-tax rates quickly began
climbing and almost immediately jumped above U.S. levels. Ironically, the VAT
facilitated higher tax rates on income since politicians often argued that a
higher VAT had to be accompanied by higher income-tax burdens to ensure the
tax burden wasn’t being shifted to lower-income taxpayers.
|
Neil,
page 6
|
|
The
problem, however, is that it is biased upward over time, because it is so
tempting for legislatures to produce more revenue by making small rate
increases. When imposed in 1967, Denmark’s VAT was ten (10%) percent; it is
now twenty-five (25%) percent, in addition to a top income tax rate of around
fifty-nine (59%) percent. A year later, in 1968, Germany levied a ten (10%)
percent VAT. Germans are more fortunate; their VAT has risen “only”to
nineteen (19%) percent, and their highest income tax rate is “only”
forty-five (45%) percent. Twenty-nine (29) OECD countries have VATS, and only
three: Canada, Japan and Switzerland apply rates under ten (10%) percent. The
others impose rates of ten (10%) percent or more, and twelve (12) have rates
of twenty (20%) percent or higher. In sum, the notion that a VAT will be a
small, single-digit tax is not born out of other countries’ experience. In
fact, in many countries, the VAT is the largest source of government
revenue.(Furchtgott-Roth,2009)
|
The
problem with the VAT is that it is biased upward over time, because it is so
tempting for legislatures to produce more revenue by making small rate
increases. When imposed in 1967, Denmark’s VAT was 10%; it is now 25%, in
addition to a top income tax rate of around 59%. A year later, in 1968,
Germany levied a 10% VAT. Germans are more fortunate; their VAT has risen
“only” to 19%, and their highest income tax rate is “only” 45%.
Twenty-nine
OECD countries have VATs, and only three— Canada , Japan , and Switzerland
—apply rates under 10%. The others impose rates of 10% of more, and 12 have
rates of 20% or higher. In sum, the notion that a VAT will be a small,
single-digit tax is not born out by other countries’ experience. In fact, in
many countries the VAT is the largest source of government revenue.
|
Neil, page 6
|
[Note
that Neil appears to give the correct source at the end of one sentence, but
does not indicate when he is quoting directly from this source]
|
SUMMARY
It is
politically unrealistic to expect that a VAT would be substituted for the
income tax, so it would end up being an additional levy, one that enlarges
the government’s claim on the rest of the economy. A VAT has the potential to
fund all of Congress’ pet projects, such as cap and trade, renewable energy,
electric cars, high speed rail, and, of course, healthcare. It is the
taxpayers who would be the losers in the end. (Furchtgott-Roth, 2009)
|
It’s
politically unrealistic to expect that a VAT would be a substitute for the
income tax, so it would end up being an additional levy, one that enlarges
the government’s claim on the rest of the economy. ….
A
VAT has the potential to fund all of Congress’s pet projects, such as
cap-and-trade, renewable energy, electric cars, high speed rail, and, of
course, health care. It’s the taxpayers who would be the losers.
|
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