The Value-Added Tax Is Not the Answer

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This originally
appeared in Human Events, March 11, 1972.

One of the
great and striking facts of recent months is the growing resistance
to further taxes on the part of the long-suffering American public.
Every individual, business, or organization in American society
acquires its revenue by the peaceful and voluntary sale of productive
goods and services to the consumer, or by voluntary donations
from people who wish to further whatever the group or organization
is doing. Only government acquires its income by the coercive
imposition of taxes. The welcome new element is the growing resistance
to further tax exactions by the American people.

In its endless
quest for more and better booty, the government has contrived
to tax everything it can find, and in countless ways. Its motto
can almost be said to be, "If it moves, tax it!"

Every income,
every activity, every piece of property, every person in the land
is subject to a battery of tax extortions, direct and indirect,
visible and invisible. There is of course nothing new about this;
what is new is that the accelerating drive of the government to
tax has begun to run into determined resistance on the part of
the American citizenry.

It is no
secret that the income tax, the favorite of government for its
ability to reach in and openly extract funds from everyone’s income,
has reached its political limit in this country. The poor and
the middle class are now taxed so heavily that the federal government,
in particular, dares not try to extort even more ruinous levies.

The outraged
taxpayer, after all, can easily become the outraged voter. How
outraged the voters can be was brought home to the politicians
last November, when locality after locality throughout the country
rose in wrath to vote down proposed bond issues, even for the
long-sacrosanct purpose of expanding public schools.

in New York

The most
heartening example – and one that can only give us all hope
for a free America – was in New York City, where every leading
politician of both parties, aided and abetted by a heavily financed
and demagogic TV campaign, urged the voters to support a transportation
bond issue. Yet the bond issue was overwhelmingly defeated –
and this lesson for all of our politicians was a sharp and salutary

the property tax, the mainstay of local government as the income
tax is at the federal level, is now generally acknowledged to
have a devastating effect on the nation’s housing. The property
tax discourages improvements and investments in housing, has driven
countless Americans out of their homes, and has led to spiraling
tax abandonments in, for example, New York City, with a resulting
deterioration of blighted slum housing.

in short, has reached its tax limit; the people were finally saying
an emphatic "No!" to any further rise in their tax burden.
What was ever-encroaching government going to do? The nation’s
economists, most of whom are ever eager to serve as technicians
for the expansion of state power, were at hand with an answer,
a new rabbit out of the hat to save the day for Big Government.

They pointed
out that the income tax and property tax were too evident, too
visible, and that so are the generally hated sales tax
and excise taxes on specific commodities. But how about a tax
that remains totally hidden, that the consumer or average
American cannot identify and pinpoint as the object of his wrath?
It was this deliciously hidden quality that brought forth the
rapt attention of the Nixon administration, the "Value Added
Tax" (VAT).

The great
individualist Frank Chodorov, once an editor of Human Events,
explained clearly the hankering of government for hidden taxation:

It is
not the size of the yield, nor the certainty of collection,
which gives indirect taxation [read: VAT] preeminence in the
state’s scheme of appropriation. Its most commendable quality
is that of being surreptitious. It is taking, so to speak, while
the victim is not looking.

who strain themselves to give taxation a moral character are
under obligation to explain the state’s preoccupation with hiding
taxes in the price of goods. (Frank Chodorov, Out
of Step
, Devin-Adair, 1962, p.

The VAT is
essentially a national sales tax, levied in proportion to the
goods and services produced and sold. But its delightful concealment
comes from the fact that the VAT is levied at each step of the
way in the production process: on farmer, manufacturer, jobber
and wholesaler, and only slightly on the retailer.

The difference
is that when a consumer pays a 7 percent sales tax on every purchase,
his indignation rises and he points the finger of resentment at
the politicians in charge of government; but if the 7 percent
tax is hidden and paid by every firm rather than just at retail,
the inevitably higher prices will be charged, not to the government
where it belongs, but to grasping businessmen and avaricious trade

While consumers,
businessmen, and unions all blame each other for inflation like
Kilkenny cats, Papa government is able to preserve its lofty moral
purity, and to join in denouncing all of these groups for "causing

It is now
easy to see the enthusiasm of the federal government and its economic
advisers for the new scheme for a VAT. It allows the government
to extract many more funds from the public – to bring about
higher prices, lower production, and lower incomes – and
yet totally escape the blame, which can easily be loaded on business,
unions, or the consumer as the particular administration sees

The VAT is,
in short, a looming gigantic swindle upon the American public,
and it is therefore vitally important that it not pass. For if
it does, the encroaching menace of Big Government will get another,
and prolonged, lease on life.

One of the
selling points for VAT is that it is supposed only to replace
the property tax for its prime task of financing local public
schools. Any relief of the onerous burden of the property tax
sounds good to many Americans.

But anyone
familiar with the history of government or taxation should know
the trap in this sort of promise. For we should all know by now
that taxes never go down. Government, in its insatiable
quest for new funds, never relaxes its grip on any source of revenue.

You know
and I know that the property tax, even if replaced for school
financing, will not really go down; it will simply be shifted
to other expensive boondoggles of local government. And we also
know full well that the VAT will not long be limited to financing
the schools; its vast potential (a 10 percent VAT would bring
in about $60 billion in revenue) is just too tempting for the
government not to use it to the hilt, and, in the famous words
of New Dealer Harry Hopkins, "to tax and tax, spend and spend,
elect and elect."

Let us now
delve more deeply into the specific nature of the VAT. A given
percentage (the Nixon administration proposal is 3 percent) is
levied, not on retail sales, but on the sales of each stage of
production, with the business firm deducting from its liability
the tax embodied in the purchases that he makes from previous
stages. It is thus a sales tax hidden at each stage of production,
from the farmer or miner down to the retailer.

A "Regressive"

The most
common criticism is that the VAT, like the sales tax, is a "regressive"
tax, falling largely on the poor and the middle class, who pay
a greater percentage of their income than the rich. This is a
proper and important criticism, especially coming at a time when
the middle class is already suffering from an excruciating tax

Nixon administration proposes to alleviate the burden on the poor
by rebating the taxes through the income tax. While this may alleviate
the tax burden on the poor, the middle class, which pays most
of our taxes anyway, will hardly be benefited.

there is a more sinister element in the rebate plan: for some
of the poor will get cash payments from the IRS, thereby bringing
in the disastrous principle of the guaranteed annual income (FAP)
through the back door.

But the VAT
is in many ways far worse than a sales tax, apart from its hidden
and clandestine nature. In the first place, the VAT advocates
claim that since each firm and stage of production will pay in
proportion to its "value added" to production, there
will be no misallocation effects along the way.

But this
ignores the fact that every business firm will be burdened by
the cost of innumerable record keeping and collection for the
government. The result will be an inexorable push of the business
system toward "vertical mergers" and the reduction of

for example, that a crude-oil producer adds the value of $1,000,
and that an oil refiner adds another $1,000, and suppose for simplicity
that the VAT is 10 percent. Theoretically, it should make no difference
if the firms are separate or "integrated"; in the former
case, each firm would pay $100 to the government; in the latter,
the integrated firm would pay $200. But since this comforting
theory ignores the substantial costs of record keeping and the
collection, in practice if the crude-oil firm and the oil refiner
were integrated into one firm, making only one payment, their
costs would be lower.


Hence, vertical
mergers will be induced by the VAT, after which the Antitrust
Division of the Department of Justice would begin to clamor that
the free market is producing "monopoly" and that the
merger must be broken by government fiat.

The costs
of record keeping and payment pose another grave problem for the
market economy. Obviously, small firms are less able to bear these
costs than big ones, and so the VAT will be a powerful burden
on small business, and hamper it gravely in the competitive struggle.
It is no wonder that some big businesses look with favor on the

There is
another grave problem with VAT, a problem that the Western European
countries which have adopted VAT are already struggling with.

In the VAT,
every firm sends its invoices to the federal government, and gets
credit for the VAT embodied in its invoices for the goods bought
from other firms. The result is an irresistible opening for cheating,
and in Western Europe there are special firms whose business is
to write out fake invoices which can reduce the tax liabilities
of their "customer." Those businesses more willing to
cheat will then be favored in the competitive struggle of the

A further
crucial flaw exists in the VAT, a flaw which will bring much grief
to our economic system. Most people assume that such a tax will
simply be passed on in higher prices to the consumer. But the
process is not that simple. While, in the long run, prices to
consumers will undoubtedly rise, there will be two other important
effects: a large short-run reduction in business profits, and
a long-run fall in wage incomes.

The critical
blow to profits, while perhaps only "short-run," will
take place at a time of business recession, when many firms and
industries are suffering from low profits and even from business
losses. The low-profit firms and industries will be severely hit
by the imposition of VAT, and the result will be to cripple any
possible recovery and plunge us deeper into recession. Furthermore,
new and creative firms, which usually begin small and with low
profits, will be similarly crippled before they have scarcely

The VAT will
also have a severe, and so far unacknowledged, effect in aggravating
unemployment, which is already at a high recession rate. The grievous
impact on unemployment will be twofold. In the first place, any
firm that buys, say, machinery, can deduct the embodied VAT from
its own tax liability; but if it hires workers, it can make no
such deduction. The result will be to spur over-mechanization
and the firing of laborers.

part of the long-run effect of VAT will be to lower the demand
for labor and wage incomes; but since unions and the minimum-wage
laws are able to keep wage rates up indefinitely, the impact will
be a rise in unemployment. Thus, from two separate and compounding
directions, VAT will aggravate an already serious unemployment

Hence, the
American public will pay a high price indeed for the clandestine
nature of the VAT. We will be mulcted of a large and increasing
amount of funds, extracted in a hidden but no less burdensome
manner, just at a time when the government seemed to have reached
the limit of the tax burden that the people will allow. It will
be funds that will aggravate the burdens on the already long-suffering
average middle-class American. And to top it off, the VAT will
cripple profits; injure competition, small business, and new creative
firms; raise prices; and greatly aggravate unemployment. It will
pit consumers against business, and intensify conflicts within

One of the
justly famous "laws"
is that, for government, "expenditure
rises to meet income." If we allow the government to find
and exploit new sources of tax funds, it will simply use those
funds to spend more and more, and aggravate the already fearsome
burden of Big Government on the American economy and the American

The only
way to reduce Big Government is to cut its tax revenue, and to
force it to stay within its more limited means. We must see to
it that government has less tax funds to play with, not more.
The first step on this road to lesser government and greater freedom
is to see the VAT for the swindle that it is, and to send it down
to defeat.


N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic
vice president of the Mises
. He was also editor — with Lew Rockwell —
of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor.

Best of Murray Rothbard

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