Congress and the new administration are now floating around the idea of creating a federal value added tax. A value added tax, also known as the VAT, is a nation sales tax. The United States is one of the few countries that does not have one. This is not the same thing as the retail sales tax that we are all accustomed to. In a VAT system the tax is built into all prices, rather than visibly tracked at the time of a purchase. It is a tax that consumers have to pay for at every step of the inventory process, from manufacturer to distributor to warehouse to retailer to customer. In contrast, a sales tax is a single retail tax consumers have to pay for only at the time they purchase an item, and as a result it is typically much lower in cost. The VAT will have an enormous affect on us because it will raise the cost of almost everything we buy, but many won't even realize it because the cost will be hidden in price of items. It's similar to a sales tax but different "because the consumer doesn't see the added cost, somewhat like the way that excise and other taxes are buried in the prices of gasoline, alcohol, cigarettes, etc." So in addition to the sales tax you normally pay (which continues to keep going up), you will also be forced to pay this federal tax and because it is hidden in the price of everything, you probably won't even know exactly how much extra you will be paying. Here are some key points taken from the Heritage Foundation explaining what the VAT will do.

I'm warning you ahead of time that this article is blunt, but it is from my perspective as an economist and is also the perspective of The Economist and Forbes.com. Do not comment unless you have read the entire article. Comments will be deleted at my discretion.

Did you know that 90% of all the jobs that were created in the past 10 years, were created by small businesses. Fourty-five percent of all the current employment in the US can also be attributed to small businesses, and you won't believe this.....98% of all the jobs in the private sector can be accredited to small businesses, not large corporations (Newsweek, 2009). That’s amazing if you ask me. President Obama even said in March 2009, that "If small businesses fail, we all fail.” He says he wants small businesses to succeeded, but he wants to increase taxes on people making over $200K a year and what he fails to understand is that 99% of small business owners fill their taxes as individuals in order to save money for their businesses. It might seem like these individuals are making over $200k, but they have to pay their employees and their overhead fees and whatever profit is left they typically recycle back into their business. These aren’t wealthy people. They’re hard working middle class people and the more money they save, the more employees they are able to hire, which means fewer people will be out of work and the better off our economy will be.

Obama says that he only wants to increase taxes for "the rich" but the truth is the rich never pay taxes anyway because their accountants find loop holes in the system, or they stash their cash in foreign accounts. The billionaire Warren Buffet even admitted that he never pays tax. So when Obama says that he wants to increase tax on "the rich," the truth is their taxes will not increase because they don't pay tax. He will be increasing tax on small businesses who are the back bone of this economy. And because small business owners have been stuck with the bulk of the tax burden in this country, they are never able to hire more people. Instead they have to lay off people or they eventually go out of business. Plus it's becoming more difficult for ordinary people to start their own business because of the ever increasing tax and regulation barriers on businesses that the government has created in order to limit the competition of large corporations. Thus, people become stuck at dead end jobs working for someone else and are never able to obtain their own wealth by working for themselves. Furthermore, when there is a lack of small businesses in a community, the local schools suffer because schools survive off of the tax money that local businesses generate. So you might think that Obama's tax increases won't affect you but they will because when you increases tax on small businesses at a time when they are already struggling to survive, they go out of business and local communities suffer, schools suffer, unemployment goes up and the price of food, rent, utilities and everything else goes up as well. The economy gets worse, rich people stay rich and everyone else gets poorer.

If the president would instead enforce a low flat tax for all (i.e. 10% of everyone's  income), then rich people would finally stop stashing their cash in foreign accounts and the government would be able to bring in huge amounts of revenue without hurting the majority. It would also remove some of the barriers that have been put up for people who want to start a business, making it more possible for them to obtain wealth by working for themselves. This was recently done in Slovakia, and the wealthy there couldn't find loop holes in the tax code anymore because it became so simple, and most of them actually wanted to pay the tax because they thought it was fair. Sales tax and all hidden taxes were abolished and remarkably, the poor didn't end up paying anymore then they had already been paying but their standard of living went up because the price of food an everything else went down (The Economist, 2005). When President John F. Kennedy enacted across-the-board tax reductions, including dropping the top tax rate, the economy boomed in the 60's (Forbes, 2005). Obama is right that "If small businesses fail, we all fail," but unfortunately his tax increases on them at a time when they are already struggling to survive, will be the very reason why they fail in the first place.

Forbes Flat Tax Article
Harvard Business School Flat Tax Article