Beating Buffett

The Fiscal Cliff – It’s Not a Revenue Problem

Much of the roadblock in solving America’s looming tax problem is touted as compromising between raising government revenue (read: taxes) or austerity (read: cutting spending/living within your means).

On the surface the debate appears to be a philosophical one. In reality there is no amount of revenue that would ‘fix’ the problem. Gases expand to fill a vacuum. Government spending expands to 100% or more of whatever taxes are collected.

Unlike most theoretical experiments we have a cheat sheet available to see the results of collecting higher revenues with the idea of cutting debt over time. The name of our cheat sheet; Europe.

Value Added Taxes [VATs] have been around for decades over there. In April 1967 a general directive for VAT collection in European nations was established although it left detailed implementation to each country to determine.

What the heck is VAT? Here’s how ExportVAT.com defined it …

Collection of a significant tax on almost all non-necessities brings in an unbelievable amount of money. VAT was projected as the be-all, cure-all solution for financing social entitlements.

The original rates were not too high. Just enough to whet the beaks of politicians. The indirect nature of the levy proved too irresistible to leave alone. As sovereign spending exploded so did VAT rates.

Alphabetically: Some VAT rates recently in effect:

Japan announced a phase in (by 2015) of a 100% jump in their VAT from today’s 5% to 10%.

Most of the countries listed are in dire financial shape despite ever increasing VAT revenues. Newly raised money does not go towards paying down debt. It simply gets redistributed from one segment of society to another.

This same trick is being used here in America. Illinois increased their state income tax rate by 66.7% yet failed to reign in deficits. California’s Prop 30 would ‘temporarily’ increase their state-level sales tax by 3.45% (from 7.25% to 7.5%).

It would also impose “millionaire” income taxes rates of up to 10.3% on incomes of $250M - $300M (+ 9.71%), 11.3% on incomes of $300M - $500 (+ 17.73%) and 12.37% on incomes above $500,000 a year. That last one is a staggering 24.39% increase from the already high state income tax rate on $500M.

Would anybody out there be willing to bet these 7-year temporary rates will ever go away if voters approve them in November? Does anyone reading this believe California or Illinois will use the newly raised income to reduce debt?

Every euro, dollar, yen, krona etc. extracted via VAT or sales tax is siphoned out of productive hands and into those of our ‘leaders’. When was the last time you saw a W-2ed employee hiring anyone (excluding other government workers)?

The only cure for too much debt is reduced spending. When did “living within your income” become a toxic concept?