Democrats in Washington are struggling to find a solution to the huge deficits created by the Obama Administration spending spree. The Commission on Fiscal Responsibility and Reform recently had its first meeting, and they are widely expected – after the November election, of course – to recommend a national VAT tax as the best way to solve the revenue crisis. The problem is that we have a VAT already.
For those not familiar with the term, a Value Added Tax (VAT) taxes the estimated market value added to a product at each stage of manufacturing or distribution. It’s similar to a sales tax, but it’s built into the price of the product (whereas a sales tax is added onto the product’s final sales price). The great thing for the political class is that the VAT is a stealth tax. You don’t know you are paying it because it’s not separately itemized.
But we already have a tax like that – it’s called the Corporate Income Tax – and, like all taxes imposed on corporations, it is passed through to the buyers of their products and services. Taxes are an expense to a corporation just like rent, employee salaries, and office supplies, and corporate profits are realized only after all expenses are paid. Corporations calculate their projected profits backwards, first by determining their expected revenue (based largely on competitive market conditions and public perception of their products) and then subtracting their anticipated expenses. To put it simply, corporations do not pay taxes – customers do.
And do we ever have a doozy of a corporate tax. Of the 30 top industrial countries, the United States has the second highest corporate tax rate, exceeded only by Japan. That is not the full story. The U.S. (unlike other countries) not only has a federal, but a state income tax. In 24 states, the combined state and federal tax exceeds the single corporate rate in Japan. That means in about half the country, the corporate tax rate is the highest in the world.