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U.S. Taxpayer Alert, We're About to Adopt Europe's Stealth Tax Model

Politics / Taxes Jun 19, 2010 - 07:58 AM GMT

By: DailyWealth


Best Financial Markets Analysis ArticleWe'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%).

Country Year Introduced Initial Rate Current Rate
Denmark 1967 10% 25%
Germany 1968 10% 19%
Spain 1986 12% 18%
France 1954 18% 20%
Ireland 1972 16% 21%
Italy 1973 12% 20%
Luxemburg 1970 8% 15%
Netherlands 1969 12% 19%
Sweden 1969 11% 25%
UK 1973 10% 18%

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,

Oliver Garret

Editor's note: Oliver Garret is the CEO of Casey Research and a contributor to The Casey Report. Each month, Oliver and the Casey team provide subscribers with the kind of investment analysis you won't find anywhere else in the world. And we consider it required reading in the DailyWealth office. Click here to learn about a risk-free trial subscription to The Casey Report.

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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