A National VAT: A Socialist Republican Solution?

The United States certainly isn’t the only nation to struggle with sluggish economic growth and a daunting government deficit. Most of its fellow G-8 countries, including Japan, Britain, and the nations of the Euro currency zone, are doing so as well.

Among these countries, though, the federal governments of the United States and France might have the most in common. Both President Obama and President Sarkozy are preparing to fight grueling re-election campaigns, appealing to voters who have grown weary of years of grinding austerity. And Sarkozy is struggling to save his nation’s sterling AAA credit rating, a battle that Obama fought and lost during the American federal budget battles last summer.

Last week, the French President pushed through a sizable increase in his government’s Value Added Tax (VAT) burden, in an effort to finance his country’s social “safety net” programs without increasing the federal deficit. Considering how often Republican presidential candidate Mitt Romney labels Obama a “European socialist,” one might have assumed that the American President would support a similar policy.

Interestingly, though, only one American presidential candidate espoused the establishment of a new tax resembling a VAT. President Obama, ironically, was not that candidate.

Nine, Nine, Nine!

Republican Herman Cain was actually the candidate who called for the imposition of a 9% sales tax, accompanied by drastic reductions in the individual and corporate income tax rates to 9% as well. Although he was originally considered a minor candidate, the astonishing popularity of his tax plan briefly sent him skyrocketing to the very top of the polls before other considerations compelled him to quit the race.

Nevertheless, he was briefly perceived as the champion of conservative Republican politics, even though he espoused the adoption of a taxation policy that was far more similar to contemporary European taxation systems than to the traditional American system. By dropping out of the race well before the first contest in Iowa, though, his policy escaped the harsh scrutiny that it likely would have received eventually.

Because Mr. Cain modified his explanation of the “nine, nine, nine” policy from time to time, it is unclear whether his sales tax would have only been levied on consumer retail purchases, or whether it also would have been levied on business-to-business wholesale transactions. A retail levy would resemble a traditional American local sales tax, while a wholesale one would more closely reflect the style of a European social VAT.

Economic Theory

Placing politics aside, one may wonder how the choice of taxation methodology would impact economic health. To put it simply, would most economists prefer to see the American government rely overwhelmingly on a national income tax (as it does now) to finance its activities? Or would they prefer to see it shift towards a sales, VAT, or other consumption based tax?

Most economists are generally in favor of higher taxes on undesirable activities and lower taxes on desirable activities. Before the global markets crashed in 2008, Americans appeared to be spending far too much, and saving (and earning) far too little. Thus, the concept of a national consumption tax appealed to many economists at the time.

Now that recessionary declines in American consumption patterns have threatened the economic recovery, though, many of these same economists now believe that a national consumption tax would crimp consumer spending and thus deter economic growth. And many conservative politicians are loathe to approve any new taxes at all, fearing that the imposition of even minor new taxes will inevitably evolve into major new levies over time.

Simplicity and Fairness

Perhaps the most baffling aspect of Cain’s popularity, though, involves the reason(s) why conservative Republican voters embraced the “nine, nine, nine” policy at all. Considering that longstanding Republican policy advocates the rejection of any increase in taxation levels, why did those voters embrace the establishment of a new system of VAT taxation along with the maintenance of the existing system of income taxation (albeit at a lower 9% level)?

One reason might have been the attractiveness of simplicity itself. In an era when a majority of Americans are compelled to use terribly complex computer programs to compute and file income taxes, the sheer simplicity of a flat 9% tax rate must have been highly desirable to many voters.

Another reason might have been the ostensible fairness of a single rate that could be applied to all Americans. After all, Warren Buffet himself famously noted that he pays lower rates of income taxation than do his secretaries. Because the contemporary American system of income taxation is actually regressive in certain respects, a flat rate tax must have been highly desirable as well.

Regardless of the reason for its attractiveness, the sight of a conservative Republican candidate embracing a European styled VAT tax with the enthusiastic support of his “base” undoubtedly represented one of the stranger moments of a highly unusual political campaign season. At times of such high levels of voter discontent, we may well experience more such unusual moments in the days ahead.