THE COMING VAT, SALES TAX OR SOME OTHER ALTERNATIVE:

The Gutting of the Middle Class

Joan Veon 

 

When President Bush was campaigning in Florida recently, he said that abolishing the U.S. income tax system and replacing it with a national sales tax was an idea worth considering.  An idea, he said, “We ought to explore seriously.”  In the last year, I have asked Treasury Secretary Snow if the Bush administration was going to implement a Value Added Tax or a national sales tax on three separate occasions. The last time was at the G7 Finance Ministers Meeting in April. His response was either negative or he refused to answer the question. So why all the mystery about changing the tax code when The Washington Post was the first to report the forthcoming switch to a consumption tax on October 31, 2002?       

 

Most recently, House Speaker Dennis Hastert wrote in his recently released book, Speaker, that America needs to eliminate taxation, litigation, and regulation in order to become more productive.  He projects that “[b]y adopting a VAT, sales tax, or some other alternative,” America’s productivity could change. 

 

In June, Paul Bedard wrote in U.S. News and World Report, “Plans being drawn up by the White House would make tax and retirement reform the hallmark of another  four years” with insiders calling the changes “Reagan-size ideas.”  He explained, “[T]reasury and congressional Republican leaders are considering a total re-write of the increasingly complicated tax code, possibly junking it in favor of a European-style value added tax or flat tax, say officials.”  Furthermore, it is expected that President Bush will unveil his plans at the Republican National Convention where the idea will become proposed policy instead of theory.        

 

In April and May of last year, I wrote two articles on the forthcoming Value Added Tax system that is to be implemented within the next ten years.  When I first told my editor about my research, he was hesitant. I then explained  where my extensive research had come from which included  the Economic Report of the President dated February 2003 that discussed the “revamping of the current income tax, moving the current tax base to one that is closer to comprehensive income or replacing the current income tax with a tax that falls only on consumption.”  He agreed to run my articles.

 

Because I love my country and wish the best for us, I am concerned enough to find out what is going on that will affect how you and I live. What has made us different from the other countries of the world is that we have a middle class.  In other words, there is a Middle America that separates the poor from the aristocratic rich.  My grave concern and belief is that a VAT or National Sales Tax-NST will destroy the middle class and our ability to “make it” thus reducing America to the same two levels which other countries have:  either the very wealthy aristocrats like the Kennedy’s, Rockefeller’s, Carnegie’s, and Mellon’s and the lower class comprised of those who used to be in the middle class with the poor. I explained this and more in my articles “Shock and awe not only for Iraqis” dated April 16 and “Bush tax package guts middle class” dated May 26. 

 

While I thought readers would welcome this information for all of the right reasons, I was dead wrong.  The responses I received constituted “Shock and Awe” hate email.  I was called things that I have not been called before. Then a nationally syndicated conservative Christian radio host called me a “Bush Basher.” I have not been on his show since.  By the way, I am a registered Republican and voted for Bush in 2002.  

 

Let us review what the politicians are going to tell us about how wonderful a VAT, sales tax, or some other alternative is going to be.  First, it will be coated in marketing language designed to captivate the most naive voter.  We will be told that it will create jobs, put money in our pockets, reduce interest rates, increase international capital flows to America making America more attractive to investors, and eliminate death taxes so our families can plan for the future without fear of estate taxes.  They will speak of it as the “optimal pro-growth tax system” or a “fairer tax system.”   These are all too familiar sweet nothings for we have heard them since the 70’s when Nixon took the dollar off the gold standard. Look where America is today--every level of government is broke. 

 

In going back and studying the effects of the Reagan tax cuts in the 1980s, I read a number of studies and papers on the internet.  First, Reagan’s tax cuts were one of the most important events of the 1980s and constituted a comprehensive overhaul of the U.S. federal income tax system.  While Reagan was looking to stimulate economic growth, curb inflation, increase employment and strengthen national defense, just as Bush is today, his tax cuts and other changes constituted a structural change in government.  In fact, it laid the foundation for what Bush is doing today. 

 

One paper from the Tax Foundation questioned how you compare the various tax cuts so that it shows or explains the differences.  They asked, “Do you compare tax cuts and national income, tax cuts and budget resources, tax cuts and defense costs or tax cuts and deficits?”  If so, the Kennedy tax cuts win over Reagan’s and Bushes. However if you use the wealth effect, then Reagan wins big time while future history will determine the real effects of Bushes three tax cuts and the to-be-made-public revamping of the entire tax code, Social Security, and Medicare systems at the RNC.  Just today in the August 13 Washington Post, writer Jonathan Weisman who broke the story in 2002, shows that the tax cuts under President Bush have increased the share of taxes paid by you and I. 

    

Reagan’s 1981 tax cut reduced the marginal rates within each tax bracket by 23%, with the top rate of 70% dropping to 50% and then to 28% in 1988.  The Tax Reform Act of 1986-TRA86, reduced the 16 tax brackets to two. Duke University economist Kirk White’s study of the “Marginal Tax Rates and Tax Reform Act of 1986: the long-run effect on the U.S. wealth distribution” made the most sense to me.  He wrote in his 2001 paper that “Studies have shown that changes in the marginal tax rates as a result of TRA86 can account for a significant portion of the increase in income inequity during the last 1980s.” He cites a study by Edward N. Wolff who showed that “wealth inequity increase significantly in the U.S. from 1983 to 1989 with the top 0.5% of households seeing the largest percentage gains [a gain of 5.2% in new worth] and  the bottom 80% losing ground [loss of 1.2%] between 1983 and 1989.”  Also, changes to capital gains taxation were also important since the wealthy obtain more of their income in the form of capital gains and corporate dividends. Furthermore, TRA86 also reduced corporate tax rates from 46% to 34%.  Now with a tax on consumption, those rates will drop to 21-24%.  Even a blind man can see that we have moved from Big Government to Big Business.

 

I find it fascinating that under Reagan, not only was inflation high with the Federal Reserve raising interest rates to the point of increasing unemployment, but a year after TRA86 was passed, the Dow lost 13% in one day while the U.S. became the world’s largest debtor nation with a trade imbalance of $170B.  Does any of this sound familiar?  So what will be the effect of changing our tax structure from a tax on income to a tax on consumption?  I believe it will further exacerbate what Reagan set in place.  While it will enhance the wealth of the wealthy, it will hinder those who do not have enough assets to benefit from the change. 

 

A tax on consumption will hit non-aristocrats much harder than those who have already accumulated.  Every time you purchase an item or a service, there will be anywhere from a 21-24% tax.   Let me mention that once this is in place and our government still has not reigned in spending that this rate can rise very easily.   

 

A VAT, sales tax or some other alternative consumption tax will levy a 21-24% tax on hair cuts and services rendered from the dentist, attorney, plumber, and electrician.  Furthermore, when you purchase a house it will come with a 21-24% tax.  The good news, according to those who have written about the national sales tax, is that you will be able to include these taxes on the purchase of your home into the mortgage loan. Isn’t that great!  Just think, if you buy a $300,000 home, you can add the $63,000 VAT, sales or some other alternative tax on the mortgage which will increase your monthly payment by only $377.72.  If you keep the house until maturity, you will pay a total of $135,979 for this opportunity.  The good news is that when you sell your house, you will get a rebate to help you with the purchase of your next home.

 

For those who just bought the “big one” with the idea that they will be able to write off mortgage interest, so sorry.  I assure you, every home in America will be taxed at some point in time.  Think of the added income to Uncle Sam’s pocketbook!  Have you seen what Smart Growth legislation has done to housing values across the country?  It has helped jack up land prices in designated growth areas by at least 33% (based on personal experience). 

 

Furthermore, Mr. Bush also wants to eliminate estate taxes.   Eliminating estate taxes will provide the aristocrats in America with the opportunity to pass on their great wealth with no taxation. While most of them already have sophisticated trusts that shelter their assets from taxation, they will not have to pay tax on their income, much of which is derived from dividends and capital gains since they will be tax free.  Furthermore, their huge estates will pass from generation to generation tax free, compounding the wealth effect like the wealth of the British royal family.  Wonder what our Forefathers would say. 

 

We are in serious financial trouble as our high federal and trade deficits comprise 10% of our GNP.   In order to “fix” the situation, a complete change is being proposed to our tax system.  In the President’s January 2004 10-Year Budget Plan, they wrote, ”[A]ssume that the individual effective tax rate will edge lower, as the share of taxes paid by the high income taxpayers shrinks in the coming years.” Their goal is to not only make government more accountable, working in partnership with the private sector, but to make the Government more citizen-centered.  All of these phrases are describing further changes that are going to be made to the current structure of government that we have. In other words, we are seeing only the tip of the iceberg.  Bush said recently these are “exciting times—times of change.”

 

The cost of living is going to go up further and compound the rising taxes at the local, county, and state levels that we are experiencing. Property taxes are rising along with all kinds of fees for  automobile licenses, hunting, fishing, etc.  Interest rates are going up at a time when the consumer is spending almost all of his discretionary income.  With credit cards maxed out at 21% interest, a 21-24% tax on consumption will not be easy. In the past your taxes were calculated using mortgage interest deductions and other types of deductions to lower your taxes.  That will all be gone. Furthermore, we are facing a lower dollar which means our money buys less overseas, again increasing our cost of living. I call this the gutting of the Middle Class. 

Lastly, what is the change in our tax code really going to do?   It will “globalize” our tax laws as we are the only country not to have a VAT or  national sales tax.  Some countries have one or the other and some even have both.  What this means is that our tax laws and systems will conform to what the rest of the world has.  This will create the right conditions for “e-money” or for a cashless society where taxes can still be collected whenever anyone spends money.   Does anyone understand that the economic, political, legal, trade, military and intelligence barriers between the nation-states are gone?

 Now the structure of our government and how we are taxed is going to conform to the new structure of and integrated world and a cashless society. 

 

Those politicians who say the current 30,000 page tax code is too onerous are the ones who made it so.  I take serious issue with using “productivity” as the reason for switching our entire tax system.  It is the politicians who have written and passed the laws that have changed our way of living.