Value-Added Tax

As the the deficit increase and the economy worsens, it is to no surprise that President Obama is forced to look for new sources of revenue. Probably the most controversial of these new ideas is the concept of implementing a value-added tax(VAT) to our economy. Before I explain what I think this tax does, I wish to express a disclaimer that I may be explaining this tax wrong because it is quite confusing.

To give you a better understanding of what VAT is, think of it as something like a sales tax, but it applies to all provisions of goods and services at each stage of production. For example, if I were to buy a desk, the production process would go something like this:
company that cuts down trees -----> company that cuts the trees into usable wood material ----> company that buys the wood to manufacture desks ----> furniture store that sells desks (there are sure to be more production steps that go into making a desk, but I tried to simplify the process)

With a VAT, the tax would be applied to each production step (4 were used in my example). This would mean that the company that cut down the trees would be taxed, the company that cut the trees into pieces would be taxed, the company that buys these pieces would be taxed, the furniture store would be taxed, and the consumer would be taxed as well. In theory, the price the consumer pays would be the same if they were subject to either a 10% sales tax or a 10% VAT. However, by taxing each individual process, companies would try to increase the price of each step. Going back to my example, this would mean that the company that is cutting down the trees would charge more for each tree to try to recover the revenue they lost from the VAT. If each company follows suit, the end price that the consumer will have to pay will be increased dramatically. A $100 desk would now cost more like $120. And if we go back to what we learned in microeconomics, we know that if we increase the price of the desk, there would be less demand for it. Consumers would have less incentive to buy that new desk and perhaps just keep using an old one.

In our economy, we need our consumers to buy more, not buy less. From what I understand from this VAT, this is what I believe will happen. If we were to look at the Laffer Curve, we would be getting less total revenue from this tax, even though the government is getting more revenue per product sold. Again, I may have completely misinterpreted what the VAT would do, but if what I said is true, I do not believe that President Obama should consider this form of tax.

http://news.yahoo.com/s/ap/20100421/ap_on_bi_ge/us_obama_tax