Not VAT Again

RUSSELL LONG usually barges into Senate hearings as if he were entering a red-neek Southern bar. Last year, he swung open the doors to a House-Senate conference drawling, "I hope it won't give anyone a brain hemmorage to hear a new idea." Well Long has just come up with a new one that's bound to give Americans more than a nose bleed. He has gotten together with Al Ullman--the Chairman of the House Ways and Means Committee--to propose a value added tax (VAT) which could drastically change the American tax system.

Had this proposal come from two ordinary legislators, there'd be nothing to worry about. But Long and Ullman control the most important committees in Congress. If they succeed in pushing their VAT through Congress, Americans will pay a regressive "hidden sales tax" which forces lower and middle income people to contribute far more than their share to a government dominated by the interests of Big Business.

Like Louis XIV at Versailles, Long wields total power in the United States Senate. For over two decades, this Democrat of the Bourbon South has controlled the Senate Finance Committee like his own fiefdom. He thus personally approves every piece of legislation which touches what Harry Truman called, "the most sensitive nerve in the human body--the pocketbook nerve." Without a doubt, Long's VAT proposal will pinch the money nerves of all Americans.

If enacted, the VAT will tax the values added to all goods at each stage of the production and sales process. Every time a manufacturer or entrepreneur raises the price of a product, the government will tax this added value at a rate of 10 percent. Without the VAT, Ernest and Julio Gallo sell their Pinot Chardonnay to a wine distributor for $18 a case. But this tax will force the Gallo Bros. to raise the price of their wine to $20, to cover the $2 they will have to pay the government. The wine distributor then sells the Pinot Chardonnay to liquor store owners for $30 to absorb a $1 VAT. He has added $10 to the price of the wine and is taxed 10 per cent of this value. Finally, the retailer must charge $50 per case, to prevent the government's $2 value added tax from cutting into his profit margin. At a rate of 10 per cent, the VAT collects a total of $5 off a case of wine which eventually sells for $50. It serves the same function as a sales tax. But instead of taking all the money in one final sale, the VAT collects its taxes in nibbles--a dollar here and a dollar there.

FOR POLITICIANS, the VAT has one fabulous advantage over a sales tax. It's hidden. Though Long and Ullman both admit that its costs will be passed onto consumers, the VAT will not look like a surcharge on sales. Instead it will be incorporated in the list prices of all goods. Consequently, most consumers who spend $50 on a case of wine will have no idea that their purchase is really worth only $45 but that the government tax has upped production and distribution costs.

In the VAT, Senator Long has devised a method to furtively reach into the pockets of American consumers. The wily Southerner has thus found a solution to Edmund Burke's perennial problem: "To tax and to please, no more than to love and be wise, is not given to man." Long seems to reply to Burke by suggesting that if politicians disguise their taxes, they can please the public, take its money and still get re-elected. With unfounded audacity, Senator Long claims that the VAT is the "least painful way of collecting money," over-looking the regressive nature of this tax. Long actually described the VAT as "somewhat like a hidden sales tax." By taxing consumption, the VAT insures that government will take larger chunks out of the earnings of lower and middle class citizens than out of the incomes of the rich. Representative Ullman tries to mitigate this inequity by taxing necessities such as food, housing and clothing at a rate of only 5 per cent. Yet this still raises the price of necessities for the poor, and it certainly doesn't permit the VAT to escape condemnation as a wholly regressive form of taxation.

Not only is the VAT regressive--it is also very complicated. In Europe it has earned a reputation for simplicity only because it replaced a vastly more complex system of business turnover taxes. But in the United States experts predict that the VAT will force businessmen to spend much more time keeping their ledgers in order. By creating more paperwork, the VAT may push marginally profitable enterprises out of business.

Ignoring these defects, Long and Ullman argue that the VAT could break America's inflationary spiral by providing the necessary incentives to boost productivity. Americans save a smaller portion of their incomes than citizens of any other western nation. With savings, so low, banks and business have limited funds to invest in expanding capital to spur productivity. The solution to this problem--for Senator Long and Representative Ullman--lies in a tax on consumption. They even propose that this consumption tax--the VAT--partially replaces the corporate profits tax to free still more money for investment. Evidently, Long and Ullman have overlooked the startling expansion of corporate profits in the past two years. In the name of productivity, they have opted for financing a rich man's corporate tax credit with the dollars of middle class American consumers.

LONG AND ULLMAN correctly calculate that an attack on our falling rate of productivity strikes at the core of America's economic woes. Yet the VAT leads this attack in a painfully misdirected way. There's no reason why the incentives for savings must come from a regressive consumption tax. As long as federal regulations limit banks' interest rates on savings accounts to 5.75% while inflation runs well over double that rate, it will make no sense for consumers to save large parts of their incomes. If the government wants Americans to save money, it must eliminate these interest ceilings and permit banks to pay a fair price for their savings.

A more equitable strategy for stimulating productivity lies in adjusting the progressive income tax to create incentives for savings. Instead of simply taxing income, the Federal government could tax income minus savings in a way that equalizes the tax burdens upon the rich and poor. With these incentives, Americans would certainly save more, banks and business would invest more, and ensuing gains in productivity would steadily combat inflation.

Unfortunately, Russell Long cannot see beyond regressive taxation as a means to solve America's economic problems. The Louisiana Senator makes no attempt to hide his disdain for equitable taxes. Asked what he thought of the American income tax system, Long replied: "I think it is progressive to the point of being counter-productive." He prefers emulation Louis XIV by extracting onerous "taillies" from lower and middle income people. The VAT's hidden character may seem appealing to politicians, but its regressive nature will certainly prove costly to most Americans.