President Joe Biden’s American Families Plan is expensive, really expensive.
According to a White House “Fact Sheet,” this $1.8 trillion plan to “grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive” includes “an additional four years of free, public education for our nation’s children” in the form of “free universal pre-school for all three- and four-year-olds and $109 billion for two years of free community college so that every student has the ability to obtain a degree or certificate”; increased Pell Grants; “direct support to families to ensure that low- and middle-income families spend no more than seven percent of their income on child care”; “a national comprehensive paid family and medical leave program”; free meals for an additional 9.3 million students; expanded access to food stamps; increases in the amount of refundable tax credits; and an increase in the “length and amount” of unemployment benefits.
Naturally, Biden wants to pay for his plan by raising taxes on “the rich” to make them “pay what they owe.” This would be accomplished in a number of ways: (1) increasing the top tax rate on “the wealthiest Americans” from 37 to 39.6 percent, (2) increasing “the tax rate that the wealthy pay on capital gains and dividends” from 20 to 39.6 percent, (3) eliminating “the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs,” (4) closing “the carried interest loophole so that hedge fund partners will pay ordinary income rates on their income just like every other worker,” (5) increasing “investment” in the Internal Revenue Service (IRS) to make sure that “large corporations, businesses, and estates, and higher-income individuals” pay their fair share, (6) making all those earning over $400,000 pay a 3.8 percent Medicare tax on their earnings.
The tax code
We will certainly see major changes in the tax code before the next congressional election. But this is not just because Biden is the president and both houses of Congress are controlled by Democrats. The Tax Cuts and Jobs Act (the TCJA, or the Trump tax cut) of 2017, although it slightly lowered the tax rates from 10, 15, 25, 28, 33, 35, and 39.6 percent to 10, 12, 22, 24, 32, 35, and 37 percent, respectively, also drastically revised the tax code. It eliminated personal exemptions, raised the standard deduction, instituted a $500 credit for each non-child dependent, doubled the child tax credit and made more of it refundable, reduced the mortgage interest deduction, lowered corporate tax rates, and capped the state and local income tax, sales tax, and property taxes (SALT) deduction. The Treasury Department released over 1,000 pages of regulations related to the TCJA.
Republicans have for years talked about making even more drastic changes to the tax code. The two main tax reform plans that they have proposed — and that some conservatives and libertarians have fallen for — are the Flat Tax and the FairTax. Advocates of both plans say that they will result in a simplified tax code, lower taxes, economic growth, and a higher standard of living. But not only is the Flat Tax not flat and the FairTax not fair, neither one is an incremental step toward lowering Americans’ overall tax burden. Both are revenue-neutral plans that would continue to fund the federal government at the same obscene level it has been at for years.
The Flat Tax is an income tax. First proposed by economist Milton Friedman in 1962, beginning in the 1980s, it was pushed by some Hoover Institution economists, the Wall Street Journal, some prominent Republican congressmen, some conservative think tanks, and former Republican presidential candidate Steve Forbes. Under the Flat Tax, there are ostensibly no tax brackets — everyone is taxed at the same rate — and no tax deductions — except for personal and dependent allowances. But because of these allowances, and because it includes refundable tax credits, the Flat Tax effectively has many tax brackets and is actually more progressive than the current tax system.
Because the Flat Tax is still an income tax, the government still says to its citizens, as so eloquently stated by Old Right stalwart Frank Chodorov in his classic book The Income Tax: Root of All Evil (1954):
Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.
The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.
“The flat-tax movement,” as explained by the economist Murray Rothbard (1926–1995), “is part of a process by which the government and its allies have been able to split and deflect the tax protest movement from trying to lower the taxes of everyone, into trying to force everyone into paying some arbitrarily defined ‘fair share.’”
The FairTax is a consumption tax. First proposed in the late 1990s, it was pushed by Americans for Fair Taxation, Representative John Linder (R-Ga.), former Republican presidential candidate Mike Huckabee, and talk-show host Neal Boortz, who wrote several books extolling the benefits of the FairTax. Under the FairTax, there is no personal or corporate income tax, tax deductions, tax credits, estate tax, gift tax, capital gains tax, unemployment tax, Social Security tax, or Medicare tax. Instead of these things, there would be a national retail sales tax of 30 percent on the final sale of all new goods and services — from food to funerals, and from hats to heart surgeries. College tuition and purchases for business purposes would be exempt. The FairTax, however, is just as progressive as the Flat Tax and the current tax system. It includes a monthly payment to all Americans to offset the taxes paid on basic necessities — almost like a universal basic income.
Not only does switching to a consumption tax have unknown and potentially huge transition costs, the FairTax would require state and local governments to pay a national sales tax to the federal government on all their purchases and the federal government to pay sales taxes to itself on all its purchases. As Rothbard has well said:
The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.
There is also always the chance that an income tax could be reinstated, resulting in a consumption tax and an income tax.
One type of tax that has generally not been considered — until now — is the Value-Added Tax (VAT). Simply put, a VAT, as described by Investopedia, “is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.” Although usually associated with the countries in the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), a VAT is used by over 160 countries. Depending on the country, a VAT is also sometimes called a General Sales Tax (GST) or a Goods and Services Tax (GST).
It used to be that proponents of a VAT for the United States wanted it to replace personal and corporate income taxes, as economist and business professor Peter Morici wrote in the Washington Times a few years ago:
The most effective reform would be to simply junk the personal and corporate income taxes in favor of a VAT.
The Treasury annually collects about $2 trillion through personal and corporate taxes. This could be replaced by an 11 percent national sales tax on all private purchases and payments — be they computer equipment, college tuition or lunch at the corner deli.
Businesses and institutions would then pay to the Treasury the taxes they collected, less sales taxes paid on purchases of materials and equipment, rent and the like. This subtraction would avoid the double taxation of materials and equipment businesses purchase and create a VAT often proposed by advocates of reform.
Since “a VAT would tax rich and poor consumers at the same rate,” Morici suggested a VAT of 14 percent and an annual payment of $4,000 to parents for each child under 21 and to seniors aged 65 and older. He further proposed eliminating Social Security and Medicare taxes and raising the VAT rate to 20 percent.
When economists talk about instituting a VAT now, it is in addition to the current personal and corporate income tax system — like it is in most every country that has some kind of VAT or national sales tax. Most recent is the proposal of Alan D. Viard, a resident scholar at the American Enterprise Institute (AEI), “where he studies federal tax and budget policy.” Viard, who received his Ph.D. in economics from Harvard University, has worked for the Federal Reserve Bank of Dallas, the Treasury Department, the White House’s Council of Economic Advisers, and the Joint Committee on Taxation of the U.S. Congress.
In 2012, Viard co-authored a book, Progressive Consumption Taxation, in which he advocated completely replacing “the income tax system with a progressive consumption tax” that “avoids the distributional problems posed by regressive consumption taxes, such as the VAT.” But in 2020, Viard contributed a chapter (“Rethink Tax Policy to Address the Long-Term Fiscal Imbalance”) to the AEI publication Governing Priorities: Advice for America’s President, for 2021 and Beyond, in which he promoted the adoption of a VAT in addition to individual and corporate income taxes. This was followed by articles espousing a VAT in various publications, capped off by a 2021 Q&A titled “Value-Added Tax Could Restrain Long-Term Federal Debt” in Southwest Economy, a publication of the Federal Reserve Bank of Dallas.
Because the United States faces “a large long-term imbalance between projected federal tax revenue and federal spending, an imbalance that has widened during the coronavirus pandemic,” Viard believes that “increases in tax revenue” are necessary. To “narrow the fiscal imbalance,” the government should adopt a VAT. Doing so “would significantly curb the debt buildup.” A VAT “offers a way to raise additional revenue while avoiding many of the income tax’s economic distortions.” Although “the individual income tax and the estate and gift tax penalize saving” and “the corporate income tax distorts decisions about business organization and financing and penalizes investment in the United States,” neither “of those penalties arise under a VAT.” Because he believes that “budgetary arithmetic makes it likely that a VAT will eventually be adopted,” Viard says that “the real question may simply be when to adopt it.” We should “seek to act sooner rather than later to limit the debt buildup and ease the fiscal burden on future generations.”
Although Viard acknowledges that a VAT is a regressive tax that would increase “taxes on the middle class” and “hurt low-income families who save less and spend more of their income,” he still supports it because a VAT “is far less regressive than benefit cuts” to Social Security and “the major health care programs.” It is also “more growth-friendly than high-income tax increases.” A VAT thus occupies “a middle ground between tax increases on the rich and entitlement cuts.”
Like Morici, Viard believes that “a VAT should — and undoubtedly would — be accompanied by rebates to offset the tax burden on low-income households.” In other words, with the VAT would come a new entitlement program to go along with food stamps; Temporary Assistance to Needy Families (TANF); Women, Infants, and Children (WIC); Medicaid; the Low Income Home Energy Assistance Program (LIHEAP); and Section 8 rent subsidies.
To the charge that “a VAT would fuel the growth of government spending because it would be a relatively invisible tax,” Viard responds that such a concern “could be addressed by requiring that the tax be listed as a separate item on customer receipts, as is normally done for state and local retail sales taxes.” The VAT would then “likely be at least as visible as employee payroll taxes and individual income tax withholding, which are displayed as line items on paycheck stubs and would be much more visible than corporate income taxes and employer payroll taxes, which are largely hidden from public view.” Virard has set up a straw man that he easily knocks down. A VAT would fuel the growth of government spending because it would give the government more money to spend. Yes, of course, a VAT could be made a visible tax, but whether the tax is visible or invisible doesn’t change anything: It still gives the government more money to spend.
There is no question that a VAT increases the cost of doing business throughout the chain of production. In addition to increased accounting and compliance costs, the tax raises the price of the raw materials used by the manufacturer, raises the price of the finished goods to the wholesaler, raises the price of the articles to the retailer, and then raises the price of the individual item purchased by the consumer. It is inconceivable that the manufacturer, the wholesaler, and the retailer would each absorb the greater part of the VAT so as to not affect the consumer. Yet, former Democratic presidential candidate Andrew Yang, who favors a VAT, claims that “while transactions through the supply chain are taxed, only a fraction of that tax is passed on to consumers.” But just as corporations don’t pay corporate taxes, people do, so corporations don’t pay value-added taxes, people do. The overall corporate tax burden is borne by shareholders through lower dividends and share prices, paid by workers in the form of lower wages, and passed along to consumers via higher prices.
Economist Dan Mitchell, who rightly dismisses the VAT as “a money machine for big government,” sums up what is wrong with adding a VAT to the tax code:
- Washington taxes too much today and wastes too much money today.
- Giving D.C. politicians even more tax revenue will encourage more fiscal profligacy.
- It is profoundly naive to think a VAT will lead to lower deficits and less debt.
- It is profoundly naive to think politicians will use VAT revenues to lower other taxes.
Who in his right mind would let the spendthrift politicians in Washington have a access to a new source of tax revenue?
The real issue
Whether a VAT is a more efficient, more effective, and more equitable form of taxation is irrelevant. Whether the addition of a VAT will “narrow the fiscal imbalance” and “significantly curb the debt buildup” is immaterial. Whether a VAT would eliminate double taxation is of no consequence. Whether a VAT is “better” than an income tax increase is neither here nor there.
If there is one thing that the U.S. government does not need, it is a new source of revenue. According to the Monthly Treasury Statement issued by the U.S. Bureau of the Fiscal Service, an agency of the Department of the Treasury, federal taxes collected during the first six months of fiscal year 2021 climbed to a record $1,703,949,000,000, a 42 percent increase over the previous fiscal year. Americans are already taxed to death, and after death — thanks to the estate tax on the federal level and in 17 states. Americans pay Social Security taxes, Medicare taxes, and income taxes, all on the same income. Thirty-nine states also tax that same income. Up to 85 percent of Social Security benefits are subject to taxation on the federal level and in 13 states. Americans pay sales taxes in all but five states. There are federal excise taxes on gasoline, tobacco, and alcohol, and state taxes on the same. Any American who travels knows how outrageous the state and local taxes are on hotels and car rentals. And let’s not forget tariffs, which, like a VAT, consumers pay via higher prices for goods.
What is even worse (if that is possible) than the amount of money the federal government takes from Americans is what the money is used for. The statement about government that was attributed to Voltaire in the eighteenth century — “The art of government is to make two-thirds of a nation pay all it possibly can pay for the benefit of the other third” — is a perfect description of the U.S. government in the twenty-first century. According to Christopher DeMuth, a distinguished fellow at the Hudson Institute:
In 1970, about 36 percent of federal spending (net of interest payments) was in the form of benefits to individuals — Social Security, the recently created Medicare and Medicaid, unemployment compensation, and means-tested welfare benefits. Benefits spending then began to grow mightily — it is now about 76 percent of federal outlays, heading briskly toward 80 percent by official estimates.
The tax code is a vast income transfer and wealth redistribution scheme. According to the latest figures (2018) released by the Internal Revenue Service (IRS), the top 50 percent of all taxpayers (in terms of adjusted gross income) paid 97.1 percent of all the income taxes, and the top 1 percent paid a greater share of income taxes than the bottom 90 percent combined.
Is there a VAT in our future? As long as Congress continues to be full of reckless and profligate members — of both parties — with a blatant disregard of the Constitution and an insatiable desire to spend other people’s money, a variety of tax increases and the closing of tax “loopholes” can be expected.
This article was originally published in the August 2021 edition of Future of Freedom.