Daily Wisdom

April 26, 2010

The VAT Is Coming

Get ready folks, the VAT (or Value Added Tax) is coming. Of all taxes, this one is perhaps the most obnoxious. If Obama and the Democrats have anything to say, it will most certainly be coming to a location near you... your wallet or purse that is.

What is a Value Added Tax? In short, it is nothing more than a National Sales Tax. You probably now pay a State Sales Tax, and perhaps even a Municipal Sales Tax whenever you buy something. Get ready to start paying more for everything, perhaps as much as 5% more.

Here in New Jersey, the State Sales Tax is 7%, so another 5% would mean a total sales tax burden of 12% on every purchase. You can calculate for yourself what the new tax burden would be where you live. But it gets worse than that.

A VAT is designed to tax EVERY sale. It taxes every step of the production process from beginning to end; in other words, wherever value is added. Therefore, the more steps there are in a production process, the more expensive the final product becomes.

Allow me to illustrate with a simple example. If you buy stone directly from a quarry, you will only have to pay the VAT once to cover that single purchase. However, if there is an intermediary such as a home improvement store, you will have to pay the VAT twice. The store will pay a VAT on the purchase from the quarry, pass on that cost to you, and then you will have to pay another VAT on your purchase from the store.

Of course, nothing is quite as simple as that. Stores buy in volume and get reduced costs from their suppliers, so my simple example might not be the best. But I think you get the idea. Costs start to add up, especially in manufacturing processes with long supply chains. The VAT can be an insidious price inflator. Think about this example...

An auto manufacturer buys seat belts from Supplier A, batteries from Supplier B, and tires from Supplier C. The auto manufacturer has to pay a VAT on each of those purchases.

In order to make the seat belts, Supplier A has to purchase nylon fibers, metal components for the buckles, labeling materials, springs for the retraction mechanism, packaging and so on. Each one of those purchases requires another VAT payment.

In order to make the batteries, Supplier B has to purchase plastic for the casing, metal posts for the electrodes, metallic plates that go in the cells, acid solution that goes into the cells, packaging and so on. Each one of those purchases requires another VAT payment.

In order to make the tires, Supplier C has to purchase the rubber, the belting material that strengthens the tire, various rubber additives, inks or dyes for labeling, packaging and so on. Again, each purchase comes with a VAT payment.

And on it goes. Suppliers have suppliers, and those suppliers have suppliers. Each supplier pays a VAT and naturally, passes on their costs to the customer. The net result is that an automobile will cost substantially more. The consumer will pay a VAT on the finished product as well as the accumulated VATs of all the vendors in the supply chain.

Clue #1
So, why do I think the VAT is coming? Simple really. There are two major clues. Clue #1 is that the media is starting to talk about this subject in a really serious way. I'll get back to Clue #2 in a minute.

The fact that the media is starting to talk about this issue suggests that the administration has been leaking information to the media and is using them to prepare us for the bad news. The media is just doing their job and following up on the leaks, but the administration is manipulating them. They are implementing a game plan that will end up with the VAT going into effect.

Here's how it works. The administration will orchestrate the media in 3 stages. Stage 1 is "Denial". That's where we are right now. When asked about whether or not the White House is considering a VAT, the answer is "NO". Robert Gibbs says a VAT is not "currently" under consideration. President Obama says a VAT is not "currently" under consideration. But guess what, if the media keeps asking about it, then maybe it should come under consideration. The media conveniently becomes the source for the idea rather than the White House itself.

Stage 2 will be "Protracted Debate" about the relative advantages and disadvantages of a VAT. Some pundits will argue that a VAT will hurt the little guy. Others will say it's a good solution to our deficit problem. Still others will say it's "fair" because everyone participates. Some will argue that it will raise prices and hurt the economy. Others will say, if you don't want to pay the VAT, then don't buy anything (as if that were possible).

Then the debate will shift from whether or not a VAT "SHOULD" be imposed, to how a VAT "COULD" be imposed. There will be editorials and TV segments telling us that "IF" we impose a VAT, then we will need to exempt certain necessities like food and clothing, or exempt certain individuals who make less than so much per year. Others will argue that fine dining in restaurants, and luxury clothing like mink stoles or designer dresses can't be exempted because they aren't "necessities".

This kind of debate will provide the impetus for lawmakers to start carving out territory as to where they stand on the issue. "I'm for THIS!" or "I'm against THAT!" is what we'll hear. Blah, blah, blah. Same old, same old.

Stage 3 will be the "Declaration of Crisis", but that will not come until after the mid-term elections in November. Serious talk about a VAT before the elections would make the situation for Democrats even more catastrophic than it already is.

But after the elections are over, then the administration will declare that there is a CRISIS. "We have huge deficits", they will say, even though this administration did everything in its power to exacerbate those deficits. "The Chinese don't want to buy our T-Bills", is what we'll hear. "We have to do SOMETHING, and we have to do it NOW!"

Clue #2
The timing of Stage 3 will conveniently coincide with a report that comes out from the "Deficit Reduction Commission" created by President Obama under an Executive Order. The official title of the Commission is the "National Commission on Fiscal Responsibility and Reform" or NCFRR. Obama's creation of that commission is actually Clue #2 that a VAT is on the way.

Think about it. Of what use is a "Deficit Reduction Commission"? Everyone knows how to reduce the deficit. There are only three options: 1) cut spending, 2) raise taxes, or 3) some combination thereof. Therefore, Obama must have some ulterior motive for creating such a commission.

At the moment, Congress has no backbone or appetite for cutting spending, raising taxes, or any combination thereof. They only want to borrow and spend. Thus, when Barack Obama asked Congress to legislate a deficit reduction commission into existence, they refused. That's when Obama decided to create the NCFRR via Executive Order.

Why is Obama so keen on having such a commission? Because he needs it to create cover for himself when he imposes the new VAT tax (or any other taxes he might have in mind). Throughout his 2008 presidential campaign, Barack Obama made a "firm pledge" not to raise "any form" of taxes on families making less than $250,000 per year. The imposition of a new VAT tax would be an obvious violation of that pledge. Therefore, he needs someone to blame it on. The NCFRR will be his scapegoat.

The NCFRR will come out with a "bi-partisan" report that will say: 1) cut spending, 2) raise taxes, or 3) some combination thereof. No surprise there, but the report will no doubt state that spending cuts are difficult to accomplish. It will state the obvious, that 60% or more of the federal budget is made up of entitlement programs. It will tell us that a big chunk of discretionary spending is dedicated to the military, and we are fighting two wars, so it is difficult to cut military spending.

The report will no doubt go on to say that even if all the non-military discretionary spending were cut, unless we made "painful" cuts to the entitlement programs it would still not be enough to close the budget deficit. Therefore, the report will say that "an important component of deficit reduction" is to raise taxes, and the VAT will be one of the taxes they offer for consideration.

The report will cite all the advantages of a VAT that have been discussed on TV and in the press ad nauseum. The report will downplay the negatives of a VAT. The report will recommend certain exclusions and/or exemptions "if" a VAT is put into place.

President Obama will then declare that "SOMETHING must be done, and done NOW!" He will say, "Look, I didn't want to raise taxes, but hey, I didn't come here to do the easy job. I came here to do the tough job. So... it's tough, but I've got to raise taxes. It wasn't my idea. It was a bi-partisan commission that came up with that one." And then the Democrats will shove it down our throats just like health care.

This is all hypothetical of course, and there is no guarantee that it will happen exactly this way. Just when you think you can see the future, your eyes start playing tricks on you. But it is certainly one of the possible alternate realities we face.

I believe that there is little hope of preventing the implementation of a new VAT tax unless a few things happen. First, the Republicans would have to take back both houses of Congress in November, and that's a long shot. If the Democrats remain in power, they will figure out some way, some trick, some scheme to shove a VAT down our throats.

Second, if the Republicans do take back control of Congress, they will have to avoid falling into the same trap of "taking the easy way out" and going for a VAT tax themselves. If past history is any indication, then Republicans can be guaranteed to lose sight of their conservative values at some point after taking control. Hopefully it will be later rather than sooner.

Third, the Tea Party movement and conservative organizations will need to continue their struggle to make themselves heard over the opposition. They need to find a way to be heard by the masses that only listen to the silence or the lunatic rantings of the paleo-stream media.

Fourth, we will need to pray. We need to ask God to forgive the sins of our country, for the slaughter of the unborn, for the sex and the violence, and for our failures as an individual and a nation. We need to ask God to "deliver us from evil" and to protect us from those who would enslave us -- either wittingly or unwittingly. We need to pray that our leaders will have the wisdom to see clearly and the courage to act decisively for the good of the nation, and not their own re-election chances. We need to ask God to help us find our way back to the intentions of the Founding Fathers -- a country that glorifies Him and liberates the individual.

That's my story, and I'm sticking with it.


At 4/26/2010 6:24 PM , Anonymous mindknumbed kid said...

It must be really good because it makes Tim Matthews' leg tingle.

At 4/26/2010 9:15 PM , Blogger Hawkeye® said...

I think you mean Chris Matthews, but that's OK. I understand completely.

(:D) Best regards...

At 4/26/2010 9:38 PM , Blogger Just call me Shelly said...

Testing 123

At 4/26/2010 9:42 PM , Blogger Just call me Shelly said...

Well my first comment went into the eternal cosmic vat I reckon.

What I said was portraying a VAT tax as an equitable and fair way of taxation is similar to calling the heath bill as free medical care.

To understand all the double talk gibberish around Washington these days you need a copy of Wearyman Webster's Dictionary

At 4/27/2010 3:54 AM , Blogger camojack said...

I hope it dies in committee...

At 4/27/2010 9:20 AM , Blogger Hawkeye® said...

Sorry you had problems commenting. Must be gremlins in the system. The cosmic "vat"?... good one. Double talk about sums it up.

(:D) Best regards...

At 4/27/2010 9:22 AM , Blogger Hawkeye® said...

I was hoping health care would die too, but like the Energizer Bunny™ it kept going and going and going.

(:D) Best regards...

At 4/27/2010 11:26 AM , Blogger Nick - The Survival Guru said...

VAT has been in the islamic republic of europe for years.

They do like to haggle over prices though and the stores keep more of the money if they sale for less...it shows a loss in income

But then I always thought VAT stood for the Vatican...Vat I Can.

nicky j

At 4/27/2010 11:34 AM , Blogger Nick - The Survival Guru said...

Let us think a moment...Health care for all will be free, especially the poor. who also will be paying the VAT to support it.

Gee kinda reminds me of the song from "West Side Story"..."Every things free in America...."

Yeah and I'm taquito bell!

angus the scott

At 4/27/2010 11:34 AM , Blogger Hawkeye® said...

Yes. I know that the VAT has been over there in Europe for years. That's why their economies have been so sluggish for years while ours flourished.

(:D) Best regards...

At 4/27/2010 5:50 PM , Blogger Beerme said...

I like vats if they're filled with the right stuff.

Seriously, though, I think you've got it just about right. Of course a National Sales tax, with no restrictions or exclusions would be a fine replacement for our Federal and State income taxes...

At 4/27/2010 7:50 PM , Anonymous mindknumbed kid said...

Tim, Chris, whatever. Apparently my brain was as tired as my body was yesterday.

At 4/28/2010 12:22 PM , Blogger Hawkeye® said...

Know what you mean about vats with the "right stuff". Frankly, I think ALL taxes should be abolished. We got along fine without an income tax up until Woodrow Wilson. I'm sure we could get along without one today.

(:D) Best regards...

At 4/28/2010 12:23 PM , Blogger Hawkeye® said...

Hope you're feeling better now.

(:D) Best regards...

At 5/09/2010 4:48 PM , Blogger radar said...

Hi Jim, you are kicking butt on comment threads!

It would be a great thing in this country if we replaced the IRS with the Fair Tax. The Fair Tax as I understand it exempts vital goods and services such as food and utilities and only taxes non-essential purchases.

Imagine what the savings to America if we simply disbanded the EPA and HUD and DEA and fired all the czars followed by the disbanding of the IRS?! What would happen if a Reagan-style President and a 1994 Congress that meant business came together in 2012? Could it be that the Federal government could be shrunk back to more Constitutional levels and local and state governments could take on their expected roles?

At 5/09/2010 4:55 PM , Blogger radar said...

Oh yeah and I was going to tell Camojack that I had a rear wheel come off of a 1985 Ford conversion van while coming into work about 15 years ago. I took a right turn and the left rear wheel just fell off! In this case that axle had one lug broken off and apparently one of the other lug nuts loosened and the wobbling soon caused others to loose and then the holes on the wheel became enlarged enough to pop over the lug nuts that were left intact!

Good thing I kept a real spare, I jacked that bad boy up, threw on the spare, managed to get three nuts on and limped the last quarter mile to work. Naturally I had to go buy a few complete lugs and nuts before I could drive that thing again.

At 5/09/2010 9:39 PM , Blogger Hawkeye® said...

Thanks for your kind words. I do what I can. A Fair Tax would be great, and like you, I'm hoping we get a new Congress and President too with some real spine to start cutting departments and spending.

Keep praying and fighting the good fight.

(:D) Best regards...


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