Quality and Value Added Tax (VAT)Posted: 04/27/2010
Every once in a while, I head west of Providence, RI for one reason or another. The western, landlocked portion of Rhode Island is full of farms, orchards, and areas for hiking, biking, and camping. Along the Interstate 295 bypass route that takes commuters around Providence is also where you will find the Rhode Island Resource Recovery Industrial Park, in Johnston RI. When my wife and I were looking for a house last year, we were all over the state at first, looking for the right neighborhood. One day I found a 3BR house stock full of amazing features, at a very reasonable price, in Johnston. Of course the reason the price was so unbelievably reasonable was its proximity to the state dump. When the wind blows, the noxious fumes from the dump often come with it.
One of the subjects some of my colleagues and I pursued at school this year was the concept of value and quality. When you purchase a quality product, which is designed with its entire life cycle in mind, and of a quality to ensure a long life, the consumer wins. When I went to the dump to drop off an old computer, it was obvious to me how many other electronic carcasses were already at the dump, awaiting disposal. So much of what is made today is designed to be replaced, to ensure that the consumer comes back for more. The difficulties in the American automobile industry can be traced back to a lack of quality product for years in comparison with their foreign competitors. To look at another industry, Interface designs their carpets to be recyclable and to minimize the use of petrochemicals in the manufacturing process. Their modular carpet designs provide a longer lasting product that fits the needs of their customers, and the environment: a win-win for the worlds leading modular carpet manufacturer.
However, in the U.S. we have gotten out of the habit of buying products that last. My wife and I still have some old pieces of furniture that were designed to last, handed down generations. The phrase “They don’t make ‘em like they used to” is unfortunately very true. A concept that many people don’t understand is Energy Returned on Energy Invested (EROEI). That is, how many units of energy does it take to produce a unit of energy? When oil was discovered, EROEI was about 100:1. Now, it is close to 3:1 and diminishing. Many of the new sources of oil, like the tar sands in Canada and the deepwater fields, require a lot of energy to get the oil out. This story is also reflected in other energy and minerals, like coal and copper. The bottom line is that we do not have a limitless source of wealth to draw from. It makes sense to create products with purpose, which will last.
Another dilemma that we face as a society is mounting debts. With the retirement of the boomers, entitlement costs will continue to rise, while the workforce of taxpayers will shrink; to deal with the mounting debt, we will need to find a new revenue source. Paul Volker favors a Value Added Tax (VAT). In fact, the President recently expressed openness to a VAT, after the Senate voted 85-13 for a non-binding resolution that calls a VAT “a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.” Derek Thompson at The Atlantic.com does a nice job discussing how a VAT works. The reason why I think a VAT could be interesting is that while it would require tax credits for poor families to make it progressive, it would create an environment where quality is encouraged rather than discouraged. If I am buying a durable good, why not save up for the one that will last the longest? A VAT could simultaneously provide revenue to tackle the debt while also encouraging quality products. The impasse right now over taxes and deficits will not last long; inevitably a tax solution will be designed. A VAT may be the right answer for the long term. After all, the U.S. is one of the few countries in the world without a VAT.