VAT tax cut

By ERNEST F. HOLLINGS, former U. S. senator


AUG. 4, 2014 -- Friends have been commenting on my suggestion of a VAT tax cut and I need to elaborate.

One friend says the VAT is dangerous because: "Raising the rates is relatively easy and can create instant surplus revenue that will expand government in unproductive ways and ventures of the whim of irresponsible, uneducated politicians who will always be with us." Our problem is not with the ease of raising rates. Our problem is with the ease of increasing the debt. Wall Street, the Big Banks, and all the economists fail to mention that we haven't paid for government since 2001. We've been borrowing almost one trillion a year; we are about to borrow a half trillion to pay for this year's government. Interest cost on the debt is $452 billion and when interest costs go up, we'll be paying almost a trillion dollars a year for nothing.

The economists will have us create the greatest waste just to keep the Wall Street profits up. We gave President Bush and Congress a balanced budget in 2001 and it wasn't just wars that increased the debt, President Bush had two big tax cuts, added prescription drugs to Medicare, stimulated and bailed out - all without paying for them increasing the debt $5 trillion in eight years. President Obama has continued the Bush tax cuts, wars, and rejected the Simpson-Bowles Commission recommendation to pay for government - increasing the debt $7 trillion in six years. The problem is a lack of revenues to pay for government - not the size of government. Besides the Corporate Tax rate is easier to raise than the VAT. No country has raised its VAT to 35 percent like the Corporate Tax rate.

Another friend questions whether the VAT "would be of any benefit?" Everybody knows the benefit of the VAT - it has no loopholes and is self-enforcing. You either pass it on or pay it. You can immediately cut the size of government (IRS). The Corporate Tax is full of loopholes for the multinationals but the Main Street Merchant pays through the nose - the full 35 percent Corporate Tax. The VAT tax cut helps small business.

The VAT has no loopholes so you have instant tax reform. The VAT is rebated on exports. The Corporate Tax is not rebated. Not having a VAT stultifies manufacture in the United States. A U.S. entrepreneur has to pay the full 35 percent Corporate Tax and when his exports reach China another 17 percent VAT. A competitor can produce the same product in China, import it tax free to the U.S. and the 52 percent difference will put the entrepreneur out of business.

Another friend writes that the VAT: "would be particularly oppressive in an economy where the disparity between rich and poor is so great." Fortunately, not yet. Our problem is that Corporate America continues to offshore its innovation, research, technology, production, jobs and payrolls- our economy. The economists blame lack of confidence for the poor economy when it's the lack of payrolls. The textile industry is gone. The steel industry is gone along with automobiles, machine tools, and computers.

Wall Street, the Big Banks and Corporate America want to keep the offshore (China) profits flowing, want us to live on imports and have no jobs. Some fool recommends mechanizing McDonald's. Another calls it communism and another sights that it only works in France because of socialism. 160 countries use the VAT not because they are socialistic, but because the VAT has no loopholes and is self-enforcing.

Another friend writes that: "the VAT is regressive." Absolutely not. The more you spend the more tax you pay. The less you spend the less tax you pay. Since the poor pay a majority of its funds for food, a card is given to the poor. At the grocery store, before the bill is paid, the card exempts them from paying the VAT.

However I am not recommending the VAT as a replacement for the personal income tax but to replace the Corporate Income Tax. All producers will include the cost of doing business or value added in their profit. I recommend a 7 percent VAT being factored in rather than 35 percent - a tax cut that raises billions more and releases $2 trillion in offshore profits for Corporate America to repatriate tax free and create millions of jobs.

Senator Hollings of South Carolina served 38 years in the United States Senate, and for many years was Chairman of the Commerce, Space, Science & Transportation Committee. He is the author of Making Government Work (University of South Carolina Press, 2008).

© 2014, Ernest F. Hollings. All rights reserved. Contact us for republication permission.

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