Value added tax

Larry Kudlow's column for April 9, 2010 noted that the "latest ominour clouds in Washington is coming from Federal Reserve Chairman Paul Volcker's recent push to get Barack Obama to to "adapt a Value Added Tax, VAT."

Actually, when Kudlow wrote his column Barack Obama's press secretary, Robert Gibbs, noted in this video that Obama was not considering the VAT. However, according to the Associated Press in this report, Obama suggested the VAT is still on the table.

The AP notes that "Before deciding what revenue options are best for dealing with the deficit and the economy, Obama said in an interview with CNBC, 'I want to get a better picture of what our options are.'

Regardless, Kudlow notes (and I agree) that a new VAT, or any new tax for that matter, during the current economic crisis.

What is VAT?

Basically, this is a tax the seller levies on the buyer every time there is a transaction between the producer of the product to the middle man, between the middle man and the transporting company, and between the transporting company and the store. Thus, the product may be taxed many times, thus raising the overall cost of the product.

In turn, all the taxes received from the product are given to the government to be used as the government chooses.

While this is the main revenue source in many countries, it won't work in the U.S. Kudlow notes one of the main reasons:

"Look, if you think for a one moment that spendthrift politicians in Washington won’t treat higher tax revenues as their very own honey pot, think again. That’s exactly what this crowd will do. If you give these guys one more nickel of tax revenue, they won’t use it to cut the deficit, they’ll spend it. They can’t help themselves. It’s why, rather than tax hikes, we need emergency-style, sharp-edged, across-the-board spending cuts everywhere in the federal government. And I mean everywhere. We’re talking government programs, departments, agencies, worker pay. You name it, slash it all.

And if you think we can tax our way into prosperity or a balanced budget, you’re wrong again. It doesn’t work. Just look at the tax-happy Europeans, who haven’t created a new private job in over two decades.

Half the people in this country don’t pay the income tax, and of the ones that do, the top 10 percent pays a staggering 70 percent of it. Meanwhile, the top 1 percent of income earners shoulders 40 percent of the overall tax burden. And now, on top of all that, Mr. Volcker wants to tax consumers and producers throughout the production and consumption chain with a VAT?
This is nuts. Absolutely nuts.

Kudlow is right. At no point in history has any government entity taxed it's way into prosperity. Likewise, more taxes does not necessarily create more revenue. That's something many progressives don't seem to grasp.