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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