The Value-Added Tax Is Not the Answer

by Murray N. Rothbard

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).

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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.

Those 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. 220)

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.

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" Tax
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 burden.

The 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.


"Furthermore, 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."Furthermore, 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 competition.

Suppose, 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.

Vertical Mergers
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 VAT!

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 market.

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 begun.

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.

Secondly, 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 problem.

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 society.

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One of the Parkinson's 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 citizen.

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.


Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher.

Why do good men do nothing?

In his book "Thoughts on the Cause of Present Discontents" (1770), the British philosopher Edmund Burke wrote, "When bad men combine, the good must associate; else they will fall one by one…" This sentiment has survived as "All that is necessary for evil to succeed is that good men do nothing."

Why do good men do nothing in the face of evil, especially when evil aggressively invades their lives?

The question has red-hot relevance to those who value the tradition of individual freedom into which America was born -- a tradition that includes freedom of speech, the right to bear arms and to demand due process. These traditional freedoms are crumbling under the wheels of run-away government. Through dozens of 'alphabet agencies' -- the IRS, BATF, CPS, DHS, et al -- government aggressively enters the lives of good men who do nothing to protect themselves or their families.

Some people are paralyzed by fear; some by denial. But many others are immobilized by an apathy that strips away the emotional will to act in self-defense.

In psychological terms, apathy is a state of constant indifference that is generally associated with depression. Apathy leaves an individual unresponsive to the world and creates a disconnect between what he believes, how he feels and which actions he takes. For example, a man might fully recognize that food is necessary to life but, because he doesn't care, he doesn't eat.

Translated into political terms, he might realize that a gluttonous government is feasting on his liberty, his wealth and even on his children's future but, because he feels only numbness toward government, he doesn't act in self-defense. He obeys even when the command is self-destructive.

The question of why people passively obey government has haunted the history of political discourse. In 1552, Étienne de la Boétie addressed what he called the most important problem confronting freedom: people consent to their own enslavement. His analysis of 'why' resulted in the world's first book on non-violent resistance, The Politics of Obedience: The Discourse of Voluntary Servitude.

Modern historians ask the same question. During the mass arrests of Stalinist Russia, people reportedly slept in their clothing not in order to flee more easily but in order to be fully dressed when seized. In Hitler's Europe, Jews reported on their own to deportation centers and to their deaths. Why?

Part of the complex answer lies in what psychologists call 'object specific' apathy. That is, a person's numbness is directed toward a specific situation and may not be manifested in other areas of his life. The same man who is passionate about music or his wife may feel impotent in the area of demanding or even wanting his own freedom.

This response is a form of 'learned helplessness.' It is 'learned' because the response comes from relentlessly teaching an individual that he has no control over a situation and, so, his efforts are futile.

The original and now-famous experiment from which the term 'learned helplessness' derives involved shocking dogs with electricity until they developed the psychology of submission. When applied to human beings, 'learned helplessness' is most often used to describe people who have been institutionalized, for example, in prisons, mental institutions or orphanages. There, the regimentation strips an individual of the smallest choice and punishes the expression of preference. In time, many institutionalized people accept the inevitability of their environment. Some of them lose all ability to feel their own preferences.

The depth of learned helplessness that comes from being institutionalized is rare. But most of us absorb a degree of this apathy through constant exposure to a society that attempts to control almost every choice in daily life: smoking, eating fast food, gun ownership, telling a rude joke at work, marriage and divorce, boarding an airplane, medical care, banking…making a phone call. It is difficult to find a choice that isn't scrutinized by bureaucracy and covered by some form of government control. The message is clear: Conformity is rewarded; the 'wrong' choices are punished or otherwise discouraged. The public school system is just one example of what could be called the institutionalizing or bureaucratizing of daily life.

The Castle, a brilliant novel by Franz Kafka, offers a window into what happens to the psychology of a man who confronts bureaucracy. Due to a mistake in paperwork, the main character K. is summoned to work in a village as a surveyor but ends up as a janitor. The Castle is the summoning authority with which K. must but cannot deal because he cannot contact the proper official. K.'s long and agonizing exercise in futility reveals the impact that bureaucracy has upon the human soul: it deadens.

K.'s error was to accept the authority of The Castle in the first place.

The foregoing observation contains good news: bureaucracy and authority require consent. And, if that consent is learned behavior, then it can also be unlearned.

Something within the human spirit seems to want to shake off destructive programming. Call it a survival instinct. Perhaps it is the inbred urge revealed by every two-year-old who yells 'no' over and over again for the simple joy of exercising veto over his own life.

Adults need to recapture the childlike joy and power of saying 'no.' The words most feared by those in authority are 'I won't.' Individuals with the habit of obedience may need to start by saying 'no' on small matters like refusing to fill in racial information on application forms. They may be shocked by how difficult it is to say 'I won't' even to petty demands. But the difficulty is a sign of how important it is. Only when a person is able to say 'no' can he say 'yes' and have the word mean more that the obedient response of a servant. 'Yes' is properly the affirmation of a free man.

Article by Wendy Mcelroy

My President is Black!

The Information Age and the End of the United States of America

You are losing your rights.

I know you probably don’t believe it; you’ve heard it all before, and yet everything has turned out okay, hasn’t it? Sure! If “okay” means a failing currency, hyperinflation, a systematic destruction of the middle class, and the end of the United States’ role as the world’s preeminent financial power — and, indeed, its role as a sovereign nation. Yep. Things are just great.


In reality, of course, things are awful — and they’re only getting worse.

The United States Constitution and Bill of Rights were written — not for those in power, but for those not in power. These are social contracts designed to limit the amount of influence wielded by any human being, or group of human beings. These contracts were created to specifically to prevent the use of complex rhetoric and emotional appeals as masks for depriving people of their liberty. Unfortunately, the documents have failed.

The Soviet Union disintegrated because it was not financially solvent — nor could it be. Central planning doesn’t work. Nonetheless, it took over half a century — and the loss of tens of millions of innocent lives — for the evil empire to collapse. How did they do it? By lying and keeping their citizens uninformed. And it worked for a while, but eventually information got through anyway, and the people would no longer have any of it.

China was much wiser. Sure, they’re a gargantuan centralized communist power, but they’re also smart enough to see what happened to the Soviets. As such, they have embraced capitalism — and even encouraged it — slowly breaking down the imperative to centralize, and providing for a great deal of autonomy among its citizenry and markets. Granted, China seems to be trying to monitor and suppress information — mostly on the internet — but does anyone really believe they’re having any success? The news channels love the story: Insidious, Oppressive Government Seeks to Censor Its Population. Really? Come on. The reality of the Internet is that it is — by design — made to circumvent impediments. The Chinese can’t block the internet! Anybody with even a cursory knowledge of the world wide web can easily find ways to get around any silly governmental attempts to limit information.

Ah, the Internet… the ultimate weapon against propagandist tyranny and oppression. The Chinese know this. They’re not really trying to block the internet; they’re just trying to assert their authority as a paternalistic entity. No; the Chinese are rolling with the punches, and they’re doing a far better job than the United States.

And that brings me to the point of this article. Everyone knows the dollar is failing. Everyone knows hyperinflation is coming. Everyone knows the American consumer is broke, and the government has more debt than any nation in history. The United States federal government flushed the Constitution and the Bill of Rights down the toilet last month when it passed Obamacare — the most unconstitutional piece of legislation ever seen in this country. And while this reform is abjectly, and obviously a blow to everything our great republic once stood for, this is by no means the first time our contracts with our government have been ignored.

As far back as Abraham Lincoln’s tenure as our nation’s Commander-in-chief, executive powers have been flagrantly abused. Indeed, the entire Civil War was an illegal act on the part of the Union — an abusive and irresponsible campaign that relied on the politicization of every topic du jour, and ultimately cost the country over 620,000 lives. And why did this happen? Because some states wanted to exercise their right to leave the Union. What an unbelievable tragedy…

Unfortunately, Lincoln’s unprecedented tyrannical behavior set the stage for a string of equally offensive abuses. You don’t believe me? Where in the Constitution did the Founding Fathers provide for the creation of the following:

1. Social Security?

2. The Federal Reserve?

3. The CIA?

4. The FBI?

5. The NSA?

6. Medicare?

7. Medicaid?

8. National health care?

I’m sure many of you have bought into the rhetoric vomited out of Washington D.C. over the last 150 years — phrases like “national security” and “executive privilege” and “times of crisis.” I, however, have not. These organizations and programs (along with so many more) are illegal. They are oppressive, expensive insults to our freedom and to the very growth of knowledge. Americans have used these organizations to circumvent the core imperatives of the very documents that made the United States of America — ignoring, and even decrying the most fundamental and yet important philosophies contained therein.

These documents were not created to be hung on a wall and forgotten; no, they were created to protect the Rights of Man. But it goes further than that. These documents were created by the minds of people like Thomas Jefferson — building on the foundations created by revolutionary philosophers like John Stuart Mill — not to protect the rights of some men, but of all human beings. Yes, you may wish to fall back on the institution of slavery — an institution loathed by Jefferson and many of his colleagues. Indeed, Jefferson fought hard to write the end of slavery into the tenets that would guide our nation. He was a champion of individuality and freedom, and while the tide of opinion ultimately prevented success in that regard, it is a vacuous argument to suggest that Jefferson and his ilk were champions of slavery. They were not. They were early revolutionaries whose ideas clashed with the tide public opinion at the time — and yet they somehow laid the foundation for universal human freedom going forward.

And now, all of their painstaking work is being threatened by the likes of George W. Bush, Barack Obama, Ben Bernanke, and Paul Krugman.

Our leaders seem to have forgotten about the principles of freedom. When Jefferson was president, he answered the door to the White House personally, and walked alone through the streets of Washington, D.C. Why? Because he didn’t believe his office was powerful enough to warrant a threat to his safety. My, how things have changed.

The U.S. now fights wars all over the globe — wars in which it has no business engaging. Our citizens have tortured other human beings, and our leaders have condoned the behavior! Does that sound like something Jefferson would have approved of?

The United States government will now try to perpetuate its policies by oppressing its own people. And because the legal challenges to the flagrant abuse of the Constitution will almost certainly be dismissed and ignored, the government’s oppression will succeed. For a little while.

Unfortunately, the days of Soviet-style information suppression really are gone for good. The United States government actually invented the internet many decades ago, and I wonder if the minds behind this revolutionary and ubiquitous technology realized it would mean their own undoing? Yes, the U.S. will react to the second wave of the economic crisis with characteristic and militaristic oppression. But it won’t work this time, because people are simply too informed. And you have but to turn on the television to take notice of the growing tide of human beings joining “tea parties” all over the world. We have not forgotten the purpose of the original event, and no amount of propaganda or twisted politicization will succeed in stemming the flood of information available to almost every human being on earth.

I will leave you with this thought: the United States of America is no longer a constitutional republic — simply because, we no longer have a Constitution. None of the elements conspiring to bring us to the current economic crisis were conceived out of respect for the aforementioned social contract — whose purpose was to stop these actors in the first place. And that leaves us with an extremely important and nagging question: if we are no longer a constitutional republic, then what are we? It sounds like a question Roman citizens probably asked themselves over 2000 years ago, as the slow, painful decline of their own empire began with the suffocation of the democratic principles on which it was founded.

But, of course, the Romans didn’t have the Internet. And that changes everything.




Paco Ahlgren

http://seekingalpha.com/instablog/339627-paco-ahlgren/62051-the-information-age-and-the-end-of-the-united-states-of-america