Tags: vat | value-added | tax | income | tax

First Trust Advisors' Wesbury: Value-Added Tax Coming

Monday, 16 Apr 2012 04:53 PM

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Unless the government finds a way to cut spending, and soon, the only possible tax solution will be a broad new levy on the middle class, most likely in the form of a value-added tax, a form of sales tax on ordinary goods that the middle class must buy, warns Brian Wesbury, chief economist at First Trust Advisors in Wheaton, Illinois.

“The United States federal budget has become so large that a tax system like the one the U.S. has used for the past 99 years cannot possibly raise enough revenue to balance it,” he writes in a column for Forbes.

“If spending is not reduced as a share of GDP, the U.S. government will eventually be forced to institute a Value Added Tax (VAT) on top of the income tax.”

Editor's Note:  How to Pay Zero Taxes . . . Legally

The reasoning is fairly simple, Wesbury contends. Higher tax rates have never managed to increase tax income as a percentage of GDP. Tax rates have been as high as 90 percent and as low as 28 percent yet tax receipts have stayed at around 19.5 percent of GDP, he writes.

Yet under President Obama’s budget proposal, he points out, spending never falls below 23 percent of GDP. Even if the richest Americans paid 100 percent taxes, it would raise just $365 billion a year, while the debt is in the trillions. “There is no tax regime in the history of the United States that has generated enough tax revenue as a share of GDP to balance the budget today, or in the future,” Wesbury contends.

Instead (or perhaps in addition), the middle class will eventually get hit to pay for the spending, probably as a VAT. Common in Europe, a VAT is often invisible to the end consumer, since taxes are levied in the production stages of goods.

Final sale prices of everything just rise. “A VAT is brutally efficient and it is regressive. It is hard to escape and even catches the underground economy. Most European countries — in fact, most countries outside the U.S. — have a VAT,” Wesbury notes.

The Senate, meanwhile, soon will debate the so-called “Buffett Rule,” which would require households earning more than $1 million to pay at least a 30 percent tax rate.

Thanks to various income exemptions, such as the lower rates on dividend income and capital gains tax breaks, it’s possible for some richer households to pay less than that rate. The bill is named after billionaire Warren Buffett, who has complained that he pays a lower tax rate than his own secretary.

"I do think it is an important message for Washington to send to middle-class Americans," Sen. Sheldon Whitehouse, D-R.I., told Reuters.

"Even if we come up short, we'll keep pushing this issue all year long."

Editor's Note:  How to Pay Zero Taxes . . . Legally

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