Beware of the
VAT!
Posted: October 25, 2005
1:00 a.m.
Eastern
By Joan Veon
For several years now, there have been moves to reform the Byzantine U.S. Tax
Code. Three years ago this month, the Washington Post ran an article titled,
"Inching Away from Income Tax-'Value-Added' Levy Would Turn System Upside Down,"
by Jonathan Weisman. In January 2003, Bush unveiled his 10-year, $674-billion
tax plan, which would give stock investors huge breaks and basically create a
feudalistic system in the United States by shifting the tax burden to the middle
class while giving huge tax breaks and the abolishment of estate taxes to the
extremely wealthy. At the time, the Post chided Bush by saying he should call
the dramatic reshaping of the federal tax system by its right name: "radical tax
reform."
Recently the President's Advisery Panel on Federal Tax Reform gave a
pre-release press briefing on the new recommendations they will unveil on Nov.
1. In this regard, it is time to revisit the whole concept of the income tax ?
and the state of the U.S. taxpayer and tax reform ? again.
First, the U.S. Tax Code was created by Congress. Some of the reasons for
changing the Tax Code include the cost and time needed to prepare the yearly
tax, the fact that there are tax loopholes that encourage unhealthy consumer
behavior, tax fraud, and the need to stimulate the economy. Our 46,000 page
Byzantine Tax Code, with its 600 different tax forms, was created by Congress.
The following tax laws ? which added tremendously more complexity ? are
abbreviated only by year they were passed: 1981, 1982, 1984, 1985, 1986, 1988,
1993, 1996, 1997, 1998 and 2001.
Secondly, those concerned with our welfare are now worried about the big
houses and the corresponding increase in consumer debt that Americans have taken
on. I would like to address this concern. How did this all happen? Let us go
back to the crash of the NASDAQ in 2000, when over $7 trillion vanished from the
stock market. In order to make people feel better about the economy and to keep
it moving, the Federal Reserve dropped interest rates over a 2-year period to
45-year lows.
The housing market then capitalized on the idea that Americans could now
"afford" to mortgage more for less interest and buy their dream home. What great
marketing! That is exactly what some did, while others decided to do what many
tycoons do and maximize their profits by taking huge tax deductions on
improvements and "flipping houses." At the same time, The Fed never complained
that the economy was being supported by this activity since 4 out of 5 jobs come
from the building industry.
The Federal Reserve then termed the consequences of our actions as creating
"the housing bubble." The Fed and the Bank for International Settlements have
warned over the past two years that the bubble could burst at any time with
adverse affects. In fact, a week before Hurricane Katrina, Federal Reserve
Chairman Alan Greenspan said in a major speech that Americans needed to reduce
their spending and save. Since then, he has warned about the housing bubble. Now
our government is coming to the rescue. They are looking to make order out of
the chaos they have created! If we were talking family dynamics, we would call
it "dysfunctional behavior."
There were a number of news reports on the pre-release press briefing. The
Oct. 19 Financial Times gave this report about the proposed changes:
[T]he panel also proposed a more radical solution to replace the current
scheme with a progressive consumption-based tax," while USAToday said that the
advisery panel "made clear that it has rejected [radical changes] including
replacing the income tax system with a national retail sales tax or combining
income taxes with a European-style value-added tax.
It appears, however, that the Advisery Panel is proposing two plans.
According to CNN, the first plan is a "simplified and heavily modified version
of the current income tax code, while the second plan introduces a consumption
tax into the system, according to reports from Reuters and Dow Jones Newswires"
(money.cnn.com, Oct. 18, 2005). In other words, the government will modify the
current tax on income system by making the following changes:
- Cut the number of tax brackets from six to four (15 percent, 25 percent,
30 percent and 33 percent)
- Eliminate the marriage penalty
- Revamp capital-gains taxes so that stocks and dividends are only taxed at
the individual level and not at the corporate level as well
- Eliminate the deductions for state and local taxes
- Limit the home-mortgage deduction to $312,895
- Cap the amount of tax-free money an employer could pay for a worker's
health-insurance plan to $11,500 for families, and
- Abolish the Alternative Minimum Tax, which would cost the government $1.2
trillion over 10 years.
Interestingly enough, Dow Jones reports that taxpayers would pay no more or
no less than they do under the current system, and that the amount of tax paid
will be distributed about the same as it is now ? but with "a lot less hassle"
according to former IRS Commissioner and panel member Charles Rossotti.
The second recommendation is that a consumption tax of 15 percent be added to
the system. This is considered a "hybrid tax code," with a tax on income and a
type of sales tax known as a value-added tax, or VAT. A VAT is a tax that is
charged at each level of the manufacturing process. Because of the added tax, it
increases the price of the item being manufactured and it reduces "hoodwinking"
the government because of the complexity of the number of participants involved
in the VAT system. It also is suppose to encourage savings and reduce
consumption, all at a time when Americans are up to their eyeballs in debt.
Furthermore, for a number of years, Americans have borne the brunt of many
criticisms about our lack of savings. Again, this is part of creating the
problem so it can be solved by "new and innovative solutions." In 1980, our
democratic government passed the Monetary De-Regulation Act, which removed
ceilings and floors on interest banks had to pay and charge on savings and
certificates of deposit. It allowed them to pay the market rate vs. a specified
amount. Up until then, savers could be guaranteed of a reasonable amount of
interest on their savings. Today, savers are getting market rates which range
from one-half percent to 1 percent. Most Americans no longer save in the banking
system, but save in the stock market, which does not count, according to the
Federal Reserve. The VAT is supposed to change this.
I am not surprised at the dual taxing system ? I predicted that our
government would piggyback a VAT to the current income tax system in an economic
newsletter I wrote a year ago. You see, in a globalized world, that is a world
where there are no barriers between the nation-states, the next step after
tearing down the economic, political, trade, legal, military and intelligence
barriers would be the harmonization of tax schemes and governmental systems.
Out of the Group of Eight countries, the United States is the only country
not to have a VAT. Out of the 30 countries that are members of the OECD, the
United States is the only country not to have a VAT. Several years ago when Bush
first recommended a VAT, the only two countries in the world not to have a VAT
were the United States and India. However, India just passed a VAT amid great
dissension. Now it is only the United States that does not have a VAT. How are
you going to have a harmonized world governmental system if the economic and tax
policies are not harmonized?
What will a VAT do? It will squeeze all those who are not in the upper 1
percent. In a post-Katrina world, the VAT will give the government greater
income at "point of sale," which means that it will not be collected just on
April 15, but every time a purchase is made: buying clothing, a house, or an
automobile, having the plumber over to fix your toilet, or having your teeth
cleaned. It will reward the rich and punish those who don't have any savings. It
will change the America we once knew.
Joan Veon is president of Veon
Financial Services, Inc., an investment advisory firm, and an independent
international reporter. Please visit her website, WomensGroup.org.
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