U.S. Taxpayer Alert: We're About to Adopt Europe's Stealth Tax Model

June 19, 2010

Back in college, I thought the Value Added Tax (VAT) was a reasonable and fair tax model. It's major effects were felt by consumers so the more you consumed the more you paid.  There were no taxes on savings or earnings... simply a tax on consumption. But wait, every time value is added to a product it is taxed,so that is a tax on production... which sounds reasonable at first until you realize that it is essentially a tax on Gross Domestic Product penalizing producers.  Of course they will pass those taxes on to consumers through higher prices which will reduce consumption putting further stress on the economy.

Unfortunately, in addition to taxing everything an economy produces there is also more sinister side to the Value Added Tax, as the years since have shown. It is basically a hidden tax so it is very easy for governments to shake down it's subjects for an additional percent or two. And before you know it the VAT becomes a mill stone around the neck of the economy.

Imagine the government sucking 25% of the GDP out of the economy and you can see how disasterous this tax can become. Because that is exactly how the Value Added Tax works... it is a tax on Gross Domestic Product (GDP).

In the following article by Oliveier Garret we can see how far Europe has traveled down the VAT road to serfdom and where the United States is headed.  Tim McMahon~editor

U.S. Taxpayer Alert: We're About to Adopt Europe's Stealth "VAT" Tax Model By Olivier Garret, CEO, Casey Research

We're headed for a massive tax increase. Federal spending is soaring at the same time that individual income tax revenues have fallen to multi-year lows. From their peak in April 2008, personal income tax receipts have fallen by $232.1 billion, or 24.6%. With few on Capitol Hill pushing for any significant reduction in expenditures, massive tax increases become inevitable. The challenge for the politicians is to ratchet up the tax collections, but in the most politically acceptable – i.e., non-transparent – fashion possible. The "value added tax" fits that bill perfectly. In its simplest form, a VAT is a tax on the creation of value. At each stage of producing a product, from raw materials to fabrication, to assembly, to packing and shipping, each company is responsible for paying a tax on the value it adds. As the VAT is always included in the retail prices, and consumers never have to pay more at the cash register, the tax increase would be hidden. In fact, consumers would no longer see a sales tax at the cash register. While that stealth will make a VAT seem "painless" to many, it is also what makes it so dangerous. (Although initially consumers would see massive price increases in the cost of everything they buy. ~editor) Most European countries introduced the VAT at rates around 10% and quickly raised it to the upper teens. Today most European countries have rates around 20% (the only notable exception is Luxemburg at 15%).   Country Year Introduced Initial Rate Current Rate Denmark 1967 10% 25% Germany 1968 10% 19% Spain 1986 12% 18% France 1954 18% 20% Ireland 1972 16% 21% Italy 1973 12% 20% Luxemburg 1970 8% 15% Netherlands 1969 12% 19% Sweden 1969 11% 25% UK 1973 10% 18% VAT rates have commonly been increased with hardly a whisper from the media. And they don't always go up in incremental single percentage points. Many European countries have raised rates three or four percent in one single year. In the case of Estonia, in 1993, rates increased by 8%. Before the widespread introduction of the VAT in Europe, in the mid-1960s, the average tax collected by European countries was only 27.7% vs. 24.7% of GDP in the U.S. By 2006, the European tax burden represented 39.8% of GDP vs. 28% for the U.S. Put another way, in less than 50 years, Europeans have seen their taxes increase by 44% as a percentage of GDP, compared to slightly more than 13% in the U.S. (Vastly increasing the United States' competitive advantage. ~editor) When the Bush tax cuts expire next year, income taxes will increase from 35% to 39.6% for the top bracket and from 33% to 36% for the next highest bracket. Further increases will be politically charged or ineffective in raising tax revenue significantly if applied only to the "rich." Revenue Implications of a Value Added Tax A 1% increase in personal income taxes on the 33% bracket brings in a mere $12 billion over ten years. Taxing the top bracket by an additional 1% brings only $71 billion over 10 years. However, the Value Added Tax (VAT) will bring in an additional $1,242 billion over the same period. There's simply no comparison. There is no question in my mind that the U.S. government will soon adopt this new tax and follow the lead of nearly 160 countries worldwide. Can You Protect Yourself from the Value Added Tax? Is there any way to protect yourself from the VAT? Is there any investment angle you can use to profit from its implementation? Unfortunately, the answer to both questions is the same – no. The only hope to avoid the Value Added Tax is if the Democrats suffer serious losses in the mid-term elections this November and the Republicans remember they are anti-tax – leading to a political gridlock that keeps any sweeping grab for new taxes off the table for the time being. Good investing, Oliver Garret Editor's note: Oliver Garret is the CEO of Casey Research and a contributor to The Casey Report. Each month, Oliver and the Casey team provide subscribers with the kind of investment analysis you won't find anywhere else in the world. Click here to learn about a risk-free trial subscription to The Casey Report.

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