Understanding Just How Dangerous a Value-Added Tax Is

By Murray N. Rothbard

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.

Defeat 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 one.

Finally, 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.

Government, 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.

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 unions.

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 inflation."

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 fit.

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.

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