Income&VAT Tax

Income Taxes and Value Added Taxes

By Richard “Chip” Peterson, PhD July 31. 2010


            At present it appears that our nation's executive and congressional branches are preparing to impose a value added tax upon the American public. Evidence that such a tax is likely to be forthcoming is that the “health care” law that was crammed down a reluctant public's throat by its so-called leaders earlier this year contains provisions that would have all businesses report to the IRS on 1099 forms the names and tax ID numbers of any business or person from whom they had purchased more than $600 worth of goods and services in any tax year. That information would be essential if a value added tax were to be imposed subsequently  upon the populace at large.

            The detailed reporting of all expenditures is required by value added tax calculations since the tax is levied upon the total value of a business firm's final sales LESS the value of purchases of goods or services that it has made from other firms. If all businesses report all purchases from others to the IRS, the IRS will then be able to sum up the value of purchases made from any one firm and thereby calculate, with good accuracy, that firm's total sales upon which the tax will be levied—prior to allowable deductions for purchases that the subject firm made from others. 

            Given the fact that the Democratic party in power wants to fund many government programs without increasing the federal deficit even more, it is clear that the desired imposition of a value-added tax would be in addition to the present income tax. That would increase the total tax burden of the public. Personally, I would favor a value added tax only if it were to be levied as  a substitute for an income tax, not in  addition to the income tax.

            Our nation's founding fathers were opposed to all forms of direct taxation, such as an income tax, that were not levied equally upon individuals in the country. While they approved of sales taxes, such as excise taxes, and tariffs, they felt that the power to tax was the power to destroy—so all taxes should be levied equally upon persons. In the late 1800s, the U.S. Congress tried to impose an income tax but it was found to be unconstitutional by the Supreme Court.

            It wasn't until the passage of the 16th amendment in 1913 that the U.S. could legally impose an income tax at the federal level. At first the maximum marginal tax rate was low, in single digits, so the tax's passage would be assured. However, marginal tax rates were quickly increased, until, under Franklin Roosevelt, the maximum rate exceeded 90%.

            Because high marginal income tax rates provide substantial disincentives for production, they tend to hurt economic growth and development in general. However, possibly an even more iniquitous result of the imposition of the  federal income tax was that large amounts of the public's funds were transferred to the control of Washington and away from the control of individuals and of state and local governments—who then had to beseech the government in an attempt to get some of their money back. A great deal of inefficient and wasted effort often results when individuals have to plead with their representatives to obtain pork-barrel spending from the federal trough. Even less visibly, much wasted effort occurs at the  state and local level as officials have to prepare grant requests to obtain block grants or other funds transfers out of the pot of money that Washington controls. State and local governments could save considerable time and expense if they could more easily fund their desirable projects themselves without having to go through an iffy and often politically dictated grant proposal process involving Washington bureaucrats and politicians. If Washington took less of the taxpayers' money, state and local governments would find it easier to finance needed projects locally, and less time and effort would be required for writing grant applications and begging Washington for funding that might or might not be forthcoming.

            Because the federal income tax gives Washington more control relative to the potentially more responsive state and local governments, it separates spending from the control of the people who fund it to too great an extent. Thus, the federal income tax has enhanced federal power at the expense of the state and local governments. That is not what our nation's founding fathers intended.

            Consequently, while I feel a flat tax would be preferable to an income tax with high marginal rates, I would rather see the federal income tax repealed altogether, and direct taxation left to the will of the individual states. If the federal government wanted to have a value-added tax, that would be preferable to a federal income tax, but it should not be added to the federal income tax. That would just centralize more power in the hands of the federal government. Thus, I would agree to a value added tax only upon the condition that the federal income tax be repealed at the same time. We cannot afford both, and a good case can be made for following the intent of our founding fathers and not allow the federal government to have the power to levy direct income taxes upon the people.




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