A few years ago I wrote a Blog on the "Value Added Tax" concept. I don't think most people here in the USA have any idea about exactly what a VAT is or how would affect our economy. Now I see some of the new Republicans talking about VAT again as part of the solution. To understand how a VAT would impact our economy and jobs here in the USA, you have to first look at how things work now.
Everyone knows that social security is on a course to failure. When it started we had 12-15 workers for every retired person. Now and in the future this ration will do down to 2 to 1. That is just one of the problems. All the money that was paid into the social security pot over the years by individuals and companies has been used to buy government bonds. It was not a lot different from what the Fed is doing now by buying new government bonds. In both cases the government spent all the money from selling the bonds and are now selling more bonds to anyone who will buy them. All of this adds to the national debit. The bottom line is that there is "no" money in the bank for future claims by social security. The other point is that we have entered into all kinds of trade agreements around the world with counties like China. We have agreed not to place tariffs on products from these countries. The result is that we are now in a "one way" trade program with China and a lot of other countries. Because of our legal, banking and distribution systems, it is a lot easier to sell products here in the USA that for us in China. We lose in 90% of these trade agreements. Now we have agreed not to tax imports to level the playing field. See the problem. Back on social security, our government did a slight of hand on how the social security is funded. The worker pays about 8% of his gross pay into social security and the employer matches it. Sounds good, but the affect is bo bury 100% of the social security in every product that we produce. That is where we screw ourselves. We make every thing that we make here more expensive by at least 15% while imported items from China don't have to add this 15% onto their products. I can only conclude that we are stupid to have such a system. Now a little history. If we produced 100% of what we use right here in the USA, it would not make any difference how we collected the tax to pay for social security, but that is not what we have now. Back in the 1930's we made 90% of what we used. In the 1940's and 1950's, the rest of the world had to buy our stuff, no matter what it cost. That is not the case now. I think that by now, you must have a better understanding of why were are in the mess that we are in.
Shifting to a VAT tax for 100% of the social security tax that amounts to about 15% will have the affect of making our products cost 15% less, while making the products imported from China 15% more. Now if we look at our consumption based on 50% being imported and 50% being produced here and a VAT of 7.5%, we would collect the same amount of tax from the VAT as we collect by the current method. You can do the math. The big difference is that our home made products would cost 7.5% less and those made in China would cost 7.5% more. I feel that this would go a very long way toward leveling the playing field. Our exports to the rest of the world would also go down by this same 7.5%.
Think about VAT and do some math and see if you don't agree? The problem is that our politicans have lied to us for so long that now when they seem to be on the right track, no one believes them. It is like the kid who cried "wolf" one too many times. I would be interested in your comments.
