This has to be the last straw, time to push and fight harder than ever.
The U.S. should consider using a European-style value added tax to help bring the deficit down, said White House adviser Paul Volcker in response to a question from CBS MoneyWatch.com at a panel discussion in New York City Tuesday night. “We have to think about really revamping the tax system,” said Volcker, who’s best known for successfully beating down inflation while serving as Ronald Reagan’s Federal Reserve chairman. The VAT, a levy on all the goods and services you consume, is not a “toxic idea,” he added.

(Credit: AP)
Until recently, discussion of a U.S. VAT had been limited to the back rooms of think tanks and cocktail hours of high-minded conferences. But nearly every other industrialized nation has one, and the idea is beginning to spread. In addition to Volcker, the head of the Senate Budget Committee, Kent Conrad (D-N.D), has mused that a VAT has “got to be on the table,” and Speaker of the House Nancy Pelosi (D-Calif.) has murmured sweet nothings about it. In fact, interest in a VAT is cropping up all along the ideological spectrum (albeit more often along the leftish end).
The case for a VAT is simple: The U.S. government’s fiscal gap is widening by the hour. The deficit for 2009 alone was a cool $1.4 trillion, and it’s projected to hit $1.6 trillion this year. By the end of the year, the Office of Management and Budget says the gross federal debt will stand at $13.8 trillion. As Bruce Bartlett, a former Reagan economic advisor who supports a VAT, puts it, “The U.S. needs a money machine.” A VAT, because it touches every transaction, is just that: The Congressional Research Service estimates that each one percent of a value-added tax would raise $50 billion. That’s real money.
To be sure, no one expects a VAT to join the tax code this year or next. But what about by 2020? The odds narrow sharply. “There’s very little chance in the next few years,” says Brian Harris, a senior research associate at Brookings, a left-of-center think tank, “but a substantial chance in the next decade or so.” And Ryan Ellis, tax policy director at the right-of-center Americans for Tax Reform, who loathes the idea, says of the VAT, “I think it’s coming, in the next five to 10 years certainly.”
What’s to Love and Hate About a VAT?
About 150 countries have a VAT. It comes in different shapes and sizes, ranging from 5 percent in Japan to 25 percent in Sweden. It’s easy to see why it’s popular: As a broad-based tax that’s easy to collect and hard to see, a VAT can rake in a lot of money.
A VAT can be assessed in several different ways. In the most common method, the VAT is assessed on a good at each stage of production and distribution — when the raw material is sold, when the product is manufactured, when a store stocks up, and when the consumer buys it. When a business calculates its VAT payment, it deducts the tax paid at the previous stage, based on records every company along the chain keeps. That’s one reason the VAT is considered highly efficient — it’s hard to dodge since each link in the VAT chain keeps an eye on the rest.
This process effectively hides the VAT from open view — unlike state sales taxes, the VAT is buried in the price of the good, not assessed at the cash register. But make no mistake: a 10 percent VAT would raise the cost of everything 10 percent. (High VAT taxes back home are one reason that Europeans love to shop in the U.S.) A VAT is also relatively simple to administer, so its “dead weight” — the distortion it imposes on the economy above and beyond the price of the tax itself — is minimal.
The VAT’s efficiency in raising money is also why some oppose it. Even if a VAT started at a low level, say 5 percent, it’s easy to increase the rate, as Europe has proved time and again. And its very simplicity and lack of visibility — no tax returns, no obvious hurt at the cash register — raises suspicions that a VAT is a stalking horse for higher spending. “I think America has prospered because the general level of taxation has been lower than Europe,” says Chris Edwards of the libertarian Cato Institute, who prefers spending cuts to new taxes. “I don’t think we should go in this direction.”
The VAT also comes under attack for being regressive. Because lower income people spend a higher portion of their earnings, it may hit them particularly hard.
The Best of the Bad?
Despite long-standing political opposition, the VAT is starting to get attention for the simple reason that it may be the best among several bad options. A useful rule of economics is that if something cannot go on forever, it will stop. Current U.S. fiscal trends are unsustainable. At some point, even Congress will recognize this fact and be forced to act. It has three options.
- Tax the rich: Always a popular idea, but the math doesn’t add up. Top tax rates are already likely to go up to almost 40 percent. An increase much above that is counterproductive, reducing incentives to work and invest while creating incentives to find tax shelters and other ways to avoid paying. And the income tax well is neither wide nor deep enough to fill more than a small piece of the $13.8 trillion hole. Ditto for taxing big business more heavily. The U.S. corporate tax rate (35 percent) is already among the highest in the world. Raising that is an excellent way to reduce competitiveness.
- Cut spending: If government spending were brought into line with revenues, new taxes wouldn’t be needed. But that isn’t happening. Ellis, of Americans for Tax Reform, points out that even if federal tax revenues return to their 40-year average of 18 to 20 percent of GDP (in 2009, it dipped to about 15 percent), the spending promises on the books for 2010 and beyond start at some 25 percent of GDP. That number is hard to knock down because the majority of federal spending is for Medicare, Medicaid, and Social Security, all of which are set to grow briskly as baby boomers retire. No one in either party seems interested in taming these leviathans. “It is almost literally impossible to close the gap on spending alone,” says Michael Linden, associate director of Tax and Budget Policy for the left-leaning Center for American Progress.
- Find new sources of revenues: If more juice cannot be squeezed from the income and corporate tax code, the logical alternative is to tap a wider base. And the logical way to do that is to pass a VAT. Alan Greenspan, for one, considers the VAT “the least worst way” to narrow the budget gap.
Neither party shows enthusiasm for taxing you if you are not a plutocrat. President Obama has pledged no tax increases for 95 percent of the population, and most Republicans flinch at the “T” word in any form. (Interestingly, though, many GOP economists favored a VAT in the 1980s, and it was Margaret Thatcher who introduced one to the U.K.). But crisis can create opportunities for reform, and America’s fiscal position is close to crisis. This may be the opportunity to take another real crack at our complicated and inefficient tax code, something last done in 1986.
A VAT could be a useful part of a larger reform. For example, in his book, 100 Million Unnecessary Returns, Columbia law professor Michael Graetz proposes a 10 to 14 percent value-added tax, but earners making less than $100,000 would pay no income tax at all, and other income and corporate taxes would be reduced. That’s just one idea. Press the buttons of almost any tax wonk in Washington and a different plan spits out; a VAT is part of most of them.
Americans as a whole did not squawk when spending rose during the Bush administration, and in electing Barack Obama, they voted for bigger government. At some point, the politics we have voted for have to be paid for. A VAT is likely to be part of the answer.
robert w says
Maybe we need to start selling these goverment buildings that are emtpy and other assets and pay off our debts, I’m sure the goverment has stuff they can sell to raise capital for debt reduction.
chris rees says
Wrong! Margaret Thatcher did NOT impose VAT on Britain! She would never have done such a thing. It was imposed by a previous “conservartive” (of the RINO ilk) named Edward Heath, who, like many fake Rightists, was just another statist.
And VAT is a bookkeeping nightmare for small business – much much worse then a straight Sales Tax (trust me, I know).
JayCPA says
I am interested in the NC Tea Party movement, but didn’t see any real information about what you stand for. I know all Americans stand for lower taxes and expenses. But what would you cut? How much? Would you cut our biggest expenditure: medicare? By how much? Would you cut defense? What is wasteful spending? Please be specific. Right now, we have a $1.5 trillion deficit. What expenses would you cut to get us to a balanced budget. If you can post these specifics as part of your mission, I will be interested in joining.
Thank you
Mirl says
I would cut spending. They don’t get it! Stop wasting my money!! Do away with income tax altogether. How much money I make is not the gov’ts business. What we need is fair consumption tax. That way anyone that buys anything pays taxes, whether they are here legally or not!!
uniteas1 says
There are a lot of areas the Tea Party movement is after Jay. Look at their signs and hear their voices. We /they are pointing out the varous views and points of government over expenditures and the waste in spending. Waste is the passing of bills and putting all that pork in the legislation when we HAVE NO MONEY. Is this the way you would run your finances? I don’t think so.
You seem to be concerned with the average citizen coming up with all the details of everythng. Do you call your Representatives and Senators and ask them to divulge all their plans and numbers? I don’t think so. They don’t even know half the time. These issues would have to be gone over just as everything else.
True there are some good social plans out there but there are a lot that need to get cut or enforced(such as medicare and the fraud involved).
STOP the ILLEGAL ALIEN INVASION that costs taxpayers millions if not billions and then the billions of dollars that get sent out of this country a year. Enforce our borders!
ARealPartiot says
@ JayCPA
They can’t be specific. All they can do is talk rhetoric.
They say they would cut spending. Did President Bush Jr. cut spending when he led us
into two wars whose objectives were to capture Osama Bin Laden and obtain Sadam’s
alleged weapons of mass destruction? Thousands of our brave men and women in uni-
form lost their lives in the process and neither of the above objectives were completed.
And now they say President Obama is wasting our money…
However, I support the freedom of speech that these tea party members practice. The
more they write, their real beliefs become more apparent. I like this tea party website in
particular because they actually have real blogs, unlike newsmax.com.
God Bless America
Dave Keys says
Plenty of opportunity for the government to tax the middle class here- as much as it wants! I just wrote about this topic on Dump The Dems – VAT Tax The Tea Party People!