We Need a VAT? We Already Have One

We Need a VAT? We Already Have One
Bruce Bialosky
Monday, June 07, 2010

Democrats in Washington are struggling to find a solution to the huge deficits created by the Obama Administration spending spree. The Commission on Fiscal Responsibility and Reform recently had its first meeting, and they are widely expected – after the November election, of course – to recommend a national VAT tax as the best way to solve the revenue crisis. The problem is that we have a VAT already.

For those not familiar with the term, a Value Added Tax (VAT) taxes the estimated market value added to a product at each stage of manufacturing or distribution. It’s similar to a sales tax, but it’s built into the price of the product (whereas a sales tax is added onto the product’s final sales price). The great thing for the political class is that the VAT is a stealth tax. You don’t know you are paying it because it’s not separately itemized.

But we already have a tax like that – it’s called the Corporate Income Tax – and, like all taxes imposed on corporations, it is passed through to the buyers of their products and services. Taxes are an expense to a corporation just like rent, employee salaries, and office supplies, and corporate profits are realized only after all expenses are paid. Corporations calculate their projected profits backwards, first by determining their expected revenue (based largely on competitive market conditions and public perception of their products) and then subtracting their anticipated expenses. To put it simply, corporations do not pay taxes – customers do.

And do we ever have a doozy of a corporate tax. Of the 30 top industrial countries, the United States has the second highest corporate tax rate, exceeded only by Japan. That is not the full story. The U.S. (unlike other countries) not only has a federal, but a state income tax. In 24 states, the combined state and federal tax exceeds the single corporate rate in Japan. That means in about half the country, the corporate tax rate is the highest in the world.

Let’s say you’re the CEO of a large corporation. You understand that corporate taxes are costs that are added into the mix just like wages and health insurance. You have to compete with companies developing products all over the world. You look around and see that you can have your headquarters in the U.S. and pay an average 39.7% corporate tax rate, or you can move your company (and many well-paying jobs) to Ireland, which has a 12.5% rate. You can now charge less for your products than your competitors in New Jersey, Massachusetts, or Pennsylvania, each of whom pays a combined rate of over 41%. Are you keeping those good American jobs at home or moving them to stay competitive?

Speaking of health insurance, during the recent health care debate, there was a lot of discussion about how high health care costs were causing companies to lose out to foreign competitors. Where is the same discussion about corporate tax rates? They are certainly making American companies non-competitive, so why no discussion about cutting those rates? Could it be that one expands government and the other is perceived to cut government?

Yet that is a false trade-off. If we cut corporate rates, we would create more jobs and attract more companies to America, causing even more job creation and in turn more government revenue. But some left-wing political elements see corporations as evil and want to punish them. They feel that corporations are not paying their fair share already and should kick in more. What a foolishly naïve understanding of today’s global marketplace, where companies can move between nations just as easily as they move between states.

The business-bashers in Washington also fail to realize that corporate taxes fall into the most evil class of taxes -- regressive. Because corporations simply pass the costs on to their customers, the taxes fall disproportionately on the backs of the less fortunate citizens of the country. The working stiff is bearing the same share of the burden of Gillette’s tax bill as the millionaire when he buys his shaving cream or blades. Where in the left-wing bible does that make sense?

Corporate taxes are just another example of the left’s misguided economic policies based on their perception of winners and losers; good and evil. Congressman Eric Cantor and Senator John McCain have proposed cutting federal corporate tax rates to 25%, which is a start. They understand the current policy just causes the little guy to lose jobs and bear the costs passed to him. In fact, we need to enact even greater cuts, but one step at a time. After the fall elections when the discussions about putting the VAT in place will inevitably heat up, you can now tell the foolish backers of it that we already have one. Let’s see how they react to that.