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U.S. Taxpayer Alert: We're About to Adopt Europe's Stealth Tax ModelBy Olivier Garret, CEO, Casey ResearchSaturday, June 19, 2010 We're headed for a massive tax increase.
Federal spending is soaring at the same time that individual income tax revenues have fallen to multi-year lows. From their peak in April 2008, personal income tax receipts have fallen by $232.1 billion, or 24.6%.
With few on Capitol Hill pushing for any significant reduction in expenditures, massive tax increases become inevitable. The challenge for the politicians is to ratchet up the tax collections, but in the most politically acceptable – i.e., non-transparent – fashion possible.
The "value added tax" fits that bill perfectly. In its simplest form, a VAT is a tax on the creation of value. At each stage of producing a product, from raw materials to fabrication, to assembly, to packing and shipping, each company is responsible for paying a tax on the value it adds.
As the VAT is always included in the retail prices, and consumers never have to pay more at the cash register, the tax increase would be hidden. In fact, consumers would no longer see a sales tax at the cash register. While that stealth will make a VAT seem "painless" to many, it is also what makes it so dangerous.
Most European countries introduced the VAT at rates around 10% and quickly raised it to the upper teens. Today most European countries have rates around 20% (the only notable exception is Luxemburg at 15%).
VAT rates have commonly been increased with hardly a whisper from the media. And they don't always go up in incremental single percentage points. Many European countries have raised rates three or four percent in one single year. In the case of Estonia, in 1993, rates increased by 8%.
Before the widespread introduction of the VAT in Europe, in the mid-1960s, the average tax collected by European countries was only 27.7% vs. 24.7% of GDP in the U.S. By 2006, the European tax burden represented 39.8% of GDP vs. 28% for the U.S.
Put another way, in less than 50 years, Europeans have seen their taxes increase by 44% as a percentage of GDP, compared to slightly more than 13% in the U.S.
When the Bush tax cuts expire next year, income taxes will increase from 35% to 39.6% for the top bracket and from 33% to 36% for the next highest bracket. Further increases will be politically charged or ineffective in raising tax revenue significantly if applied only to the "rich."
A 1% increase in personal income taxes on the 33% bracket brings in a mere $12 billion over ten years. Taxing the top bracket by an additional 1% brings only $71 billion over 10 years. However, the VAT will bring in an additional $1,242 billion over the same period. There's simply no comparison.
 There is no question in my mind that the U.S. government will soon adopt this new tax and follow the lead of nearly 160 countries worldwide.
Is there any way to protect yourself from the VAT? Is there any investment angle you can use to profit from its implementation? Unfortunately, the answer to both questions is the same – no.
The only hope to avoid the VAT is if the Democrats suffer serious losses in the mid-term elections this November and the Republicans remember they are anti-tax – leading to a political gridlock that keeps any sweeping grab for new taxes off the table for the time being.
Good investing,
Further Reading:
A while back, Steve figured out his little family four would need to pay a few million dollars in taxes to cover their portion of the U.S. government's debt burden. "Don't think it's just me," he writes. "If you make $66,000 or more, you're in the same boat!" Get his best idea for shielding your retirement nest-egg from inevitable tax increases here: The Best Way to Beat Higher Taxes.
CHART OF THE WEEK: INFLATION? DON'T MAKE OUR CHART LAUGH! Our chart of the week addresses the great "inflation vs. deflation" debate. Specifically, it is an answer to all those who howl inflation has recently been, and is now, a problem.
One "real life" way to measure inflation is to check the price of basic commodities like crude oil, corn, copper, natural gas, and cotton. We do this with the benchmark CRB Index. It's the world's most widely used gauge of commodity prices.
As you can see from this week's chart, the CRB sat at about 225 on this day 10 years ago. It enjoyed a big speculative run higher in 2007 and 2008... and then collapsed. It now sits at about 260, just 15% higher from its level in 2000. In other words, commodity prices, which would rise during a period of inflation, are basically flat for the last decade.
So... inflation later? Maybe. But inflation now? Or over the past 10 years? Don't make our chart laugh! |
81.5% Portion of the Illinois Teachers Retirement System funds recently found to be invested in credit default swaps, derivatives, and other risky investments. 
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