Opinion: Oregon and the United States Should Adopt a VAT
By Dillon Bergmann and Swastik Sharma
This article was originally published on March 27th, 2020.
All opinions and beliefs expressed in this article are those of our editorial board, and do not necessarily reflect the opinions and beliefs of the Sunset Scroll.
The concept of a value added tax (VAT) has existed for some time, and various iterations have been implemented throughout Europe and the rest of the world. Many US states have opted for a state sales tax instead, which has numerous disadvantages when compared to a VAT that will be outlined later. Oregon, on the other hand, has no sales tax, which makes us reliant on an income tax, a system that is not as reliable as a VAT is. I am of the opinion that we should implement a VAT.
Before we begin, we must define what a value added tax (VAT) is. The Tax Foundation defines it as the following:
A VAT is similar to a sales tax, except that it is paid incrementally at all levels of production, on only the value added at each level, to prevent pyramiding and eliminating the need to separate business inputs from retail sales. For example, take a wooden table sold at retail and a 10 percent VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 (10% of $50) to the government. The furniture maker sells the table to the retailer for $120, sending $7 ($120 — $50 = $70 X 10% = $7) to the government. The retailer sells the finished table to a customer for $150, sending $3 to the government ($150 — $120 = $30 X 10% = $3). The total tax paid is $15, or 10% of the final retail price.
A VAT allows states to appropriately tax commodities without creating economic uncertainty. if a government wishes to tax at a higher rate a commodity such as a high-end piece of jewelry higher than a low end piece of jewelry this could cause great confusion among consumers on what product is taxed at what rate. The external research required here regarding tax rates leads to some customers being less likely to purchase products. This leads to lost revenue for the merchants and the government.
The same can be said for exemptions. If the government wishes to exempt a certain product there will be confusion on which products are taxed and which are not. This leads to the same problem we saw in the differential in taxation issue, and is solved by the VAT by one simple change in how it is administered — the VAT is paid by the producer rather than the consumer.
VATs also have minimal impact on the average tax payer. Because a VAT is consumption tax, it needs a very low tax rate to generate large amounts of revenue. If we institute a VAT and we exempt basic necessities such as food and hygiene products, we would still get $70 billion annually per 1% of taxation using national statistics. That would easily cover the entire federal education budget and have room to cover a good chunk of the Federal Department of Agriculture’s budget, including the administration of all school lunches and food stamps.
A VAT will also allow for producers to better suit their prices aligning with the tax rate. As the VAT is already included the price of products, consumers will be more receptive to the price, making it so that companies such as Amazon will have to cut back on their enormous profits to maintain viability in the market.
With better taxation through the implementation of a VAT, other existing taxes can be lowered. We can see this exemplified in the big government policies, and more specifically finances of, the Nordic countries. Today, all the Nordic Countries have lower corporate tax rates than that of the United States because of their VATs, gaining bipartisan support. The Heritage Foundation praised these Nordic countries for the high economic freedom. In fact, Denmark was ranked higher than the United States on Heritage’s World Economic Freedom Index. Denmark finished 8th in the world, while the United States finished 22nd.
If the VAT is indicted federally or by a state the VAT will also shake our reliance on the income taxes. Currently in the United States, we have a problem: in order to raise revenue we must raise either the income tax or the payroll tax. By implementing a VAT, a third option will be created, better serving the population.
Many Oregonians need tax relief in this time of mass gentrification. Why should someone who is struggling to make ends meet be forced to pay a 8% tax on their revenue? How is that right? The fact is that we need to cut the common man’s tax bill, and a VAT will be the most efficient way to do that. With the added revenue from the VAT that would mostly come out of the pockets of big city elites, we would be able to cut everyone’s taxes. This would allow us to see great fiscal health, and allow us to see great economic growth through income tax cuts.
Another benefit that comes with the implementation of a VAT tax is the ability to shift the market away from unsustainable practices. The state of Oregon will face many tremendous challenges in the coming decades, most notably climate change and automation. A VAT will allow for the mitigation of these issues by utilizing the market rather than hindering it.
For instance, climate change has been accelerating due to the fact that fossil fuels by and large are more reliable, accessible, and cheaper to use in comparison to renewables. The Institute for Energy Resource found that businesses continue to extensively use fossil fuels to remain competitive in the market. This is especially true in rural Oregon, where natural gas and oil are far more accessible than hydroelectric dams, which are located in the north. Since VAT taxes apply on all stages of production, the state of Oregon will be able to selectively increase tax rates on methods that are nonrenewable and exacerbate global warming. The resulting profit could then be immediately redirected into subsidizing clean and renewable means of energy production.
Additionally, a VAT tax would allow us to minimize the adverse effects of automation. Oregon’s manufacturing industry accounts for 10.2% of the state’s payroll employment, two points higher than the nation as a whole. Yet, with the exception of the Columbia Gorge, employment numbers within the industry have fallen or stagnated since the Great Recession. Numerous studies, such as one done by Ball State, blame this loss on automation. They observe that businesses are incentivized to cut down human labor costs as much as possible, and that automation is a key way to do so. This wave is starting to hit some of Oregon’s most common job positions: truck drivers, retail workers, cashiers, and accountants. A VAT tax is critical because it allows us to set higher tax rates on industries that replace workers with software and hardware. The money raised can then be used to support communities that will be affected the most by automation.
A VAT will grow our economy and help us reach fiscal well being. The proposed tax serves the purpose of a consumption tax better than a sales tax, and will undoubtedly make Oregon and the United States a better place in the long run because of its fiscal advantages. I am calling on Congress, the state legislature of Oregon, and all citizens to call for and vote for this tax proposal.
