VAT: Will the U.S. Adopt a Value-Added Tax?


B00Mer
#1


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.

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 (external - login to view)," and Speaker of the House Nancy Pelosi (D-Calif.) has murmured sweet nothings (external - login to view) 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 (external - login to view), puts it, "The U.S. needs a money machine (external - login to view)." 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 (external - login to view). 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 (external - login to view). 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 (external - login to view) (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" (external - login to view) 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 (external - login to view), 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.

source: VAT: Will the U.S. Adopt a Value-Added Tax? - Econwatch - CBS News (external - login to view)
 
captain morgan
+2
#2
A VAT is the next logical step
 
Machjo
#3
What i don't like about a VAT is that there is no way around it. A carbon tax at least gives us the option of trying to cut back on gas consumption for example.

But if the goal is in fact revenue creation, yes indeed a VAT is the way to go.
 
captain morgan
+2
#4
Revenue creation is the sole purpose
 
IdRatherBeSkiing
+4
#5  Top Rated Post
Quote: Originally Posted by captain morganView Post

Revenue creation is the sole purpose

Adding a VAT task without dropping income tax rates is a tax grab. Although I have never liked the GST, when it was put in they did drop income tax by a theoretical revenue neutral amount.

I actually prefer this over income tax. You pay on what you use rather than what you earn.
 
captain morgan
#6
Quote: Originally Posted by IdRatherBeSkiingView Post

Adding a VAT task without dropping income tax rates is a tax grab. Although I have never liked the GST, when it was put in they did drop income tax by a theoretical revenue neutral amount.

I actually prefer this over income tax. You pay on what you use rather than what you earn.


I always thought that GST was put in place to eliminate the 'hidden taxes' and combine them all in one spot... That's how I thought that it was to be revenue neutral
 
IdRatherBeSkiing
+1
#7
Quote: Originally Posted by captain morganView Post

I always thought that GST was put in place to eliminate the 'hidden taxes' and combine them all in one spot... That's how I thought that it was to be revenue neutral

That too. But they did drop the income tax rates as part of the package. I think they may have done that the year before but it was part of the plan.
 
B00Mer
+1
#8
A VAT/GST tax is the best way to go for the USA. It's a FAIR tax and it also taxes the rich more than the poor (because they spend more on luxury items).. I hope the Government does like Canada and provides a rebate check to those that don't make over $25,000 or whatever the ceiling is in Canada.
 
taxslave
#9
Quote: Originally Posted by MachjoView Post

What i don't like about a VAT is that there is no way around it. A carbon tax at least gives us the option of trying to cut back on gas consumption for example.

But if the goal is in fact revenue creation, yes indeed a VAT is the way to go.

Stop buying junk you don't need. NO tax.

I think it should be like the GST. Added at the end of your bill so you know how deep the government's hand is in your pocket. The way the GSt is administered also cuts a lot of paper work and needless passing around of money only to be claimed back later.

Quote: Originally Posted by captain morganView Post

I always thought that GST was put in place to eliminate the 'hidden taxes' and combine them all in one spot... That's how I thought that it was to be revenue neutral

The GST eliminated some hidden taxes like the manufacturers sales tax but also spread the load to include services. There were ways to beat the MST but no way that I know of around GST.
 
SLM
+1
#10
Quote: Originally Posted by MachjoView Post

What i don't like about a VAT is that there is no way around it. A carbon tax at least gives us the option of trying to cut back on gas consumption for example.

Sure it can, on an idividual level. If your arguement is to influence public behaviour through taxation, that can be achieved easily enough through the so called "sin taxes". It still leave choice in the hands of the individual consumer/taxpayer though.
 
captain morgan
+2
#11
Quote: Originally Posted by SLMView Post

Sure it can, on an idividual level. If your arguement is to influence public behaviour through taxation, that can be achieved easily enough through the so called "sin taxes". It still leave choice in the hands of the individual consumer/taxpayer though.

I'm just taking a wild guess here; but I don't think that this is about influencing people's decisions - more like stealing a few bucks to pay for election bribes
 
taxslave
+1
#12
Quote: Originally Posted by captain morganView Post

I'm just taking a wild guess here; but I don't think that this is about influencing people's decisions - more like stealing a few bucks to pay for election bribes

The alternative being governments learning to live within their means.
 
captain morgan
+1
#13
Quote: Originally Posted by taxslaveView Post

The alternative being governments learning to live within their means.


Unacceptable.... Just ask Greece - they'll tell you that your proposal is in direct contravention of their rights
 
SLM
+1
#14
Quote: Originally Posted by captain morganView Post

I'm just taking a wild guess here; but I don't think that this is about influencing people's decisions - more like stealing a few bucks to pay for election bribes

Yeah, I'm just speaking to the fairness, in my opinion, of a VAT as opposed to something like a carbon tax credit system which we all know will get bogged down in bureaucracy anyway irrespective of whatever good intentions there may be behind it.
 
taxslave
+1
#15
Quote: Originally Posted by captain morganView Post

Unacceptable.... Just ask Greece - they'll tell you that your proposal is in direct contravention of their rights

What about the rights of Germans that are expected to foot the bill.
 
captain morgan
+1
#16
Quote: Originally Posted by SLMView Post

Yeah, I'm just speaking to the fairness, in my opinion, of a VAT as opposed to something like a carbon tax credit system which we all know will get bogged down in bureaucracy anyway irrespective of whatever good intentions there may be behind it.

I get what you're saying, but on the carbon tax side of things; in a way, it too is a VAT. After all, there is almost no area of commercial endeavor that is not touched by hydrocarbons and therefore the tax (transportation, power gen, mfg, etc).

In the end, any revenues from a carbon tax would no doubt end up in the general revenues account anyways.

Quote: Originally Posted by taxslaveView Post

What about the rights of Germans that are expected to foot the bill.

According to the Greeks, their rights supersede the rights of the Germans
 
SLM
#17
Quote: Originally Posted by captain morganView Post

I get what you're saying, but on the carbon tax side of things; in a way, it too is a VAT. After all, there is almost no area of commercial endeavor that is not touched by hydrocarbons and therefore the tax (transportation, power gen, mfg, etc).

Yes but it would still bury the cost of the tax in the price to the consumer. A straight up VAT is more transparent.

Quote:

n the end, any revenues from a carbon tax would no doubt end up in the general revenues account anyways.

A bad thing? Someone was mentioning earlier government cutting back on waste. Simultaneous programs which essentially do the same thing (collect tax revenues) would be a part of that.
 
IdRatherBeSkiing
+2
#18
Quote: Originally Posted by captain morganView Post

According to the Greeks, their rights supersede the rights of the Germans

If this is questioned, I am sure they will just bring up Hitler again as a way to nullify the argument.
 
petros
#19
It's about time. What took them so long to figure this out?

Quote: Originally Posted by IdRatherBeSkiingView Post

If this is questioned, I am sure they will just bring up Hitler again as a way to nullify the argument.

They'll find a way to blame al Qaeda too.
 
IdRatherBeSkiing
#20
Quote: Originally Posted by petrosView Post

It's about time. What took them so long to figure this out?


They'll find a way to blame al Qaeda too.

I've heard Hitler isn't really dead and running al Quaeda from a secret hideout in Brazil.
 
captain morgan
#21
Quote: Originally Posted by SLMView Post

A bad thing? Someone was mentioning earlier government cutting back on waste. Simultaneous programs which essentially do the same thing (collect tax revenues) would be a part of that.

... And here I thought that a carbon tax was supposed to be directed at green energy alts
 
petros
#22
Quote: Originally Posted by IdRatherBeSkiingView Post

I've heard Hitler isn't really dead and running al Quaeda from a secret hideout in Brazil.

Which al Qaeda the allied one or the bad one?
 
SLM
+1
#23
Quote: Originally Posted by captain morganView Post

... And here I thought that a carbon tax was supposed to be directed at green energy alts

Oh sure. Let's keep adding government programs. Eventually we will run out of tax to collect. Probably before we run out of crude, lol.
 
Cannuck
#24
Don't know why a VAT shouldn't be brought in. It worked well for Canada. The FTA and the GST, while divisive at the time, set the wheels in motion for our economic strength today. Mulroney was/is highly underrated.
 
petros
#25
Quote: Originally Posted by CannuckView Post

Don't know why a VAT shouldn't be brought in. It worked well for Canada. The FTA and the GST, while divisive at the time, set the wheels in motion for our economic strength today. Mulroney was/is highly underrated.

The best exmple of a VAT being a success is New Zealand. It's where the VAT was born. Mulroney copied it.
 

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