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Why the U.S. needs a Value Added Tax

September 8, 2009

Swelling deficits and an aging population leave few palatable options when it comes to taxes.

The best choice by far would be the creation of a new value added tax — a “money machine” that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.

Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.

The timing of a new tax on consumption may also seem suspect. Aren’t we supposed to be getting Americans back into the malls?

VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.

Unlike taxing the rich — which has emerged as a favorite strategy of many Democrats — a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.

Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer’s share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.

Canada, for example, gives up about a third of potential revenue by excusing food, drugs and transportation from the tax. Even if the United States did the same, a 10 percent tax rate could raise $500 billion a year, according to Eric Toder, an analyst at the Tax Policy Center.

Raise the rate to 15 percent and you get $725 billion. (In comparison, income taxes are expected to yield $968 billion this year.)

This might be hard to square with President Obama’s commitment not to raise taxes on anyone making less than $250,000 a year. VAT is a regressive tax — eating up a larger share of the income of lower wage groups.

This could be offset through the income tax system. In addition, there would be a natural counterbalance if the tax were used to fund an expansion of healthcare. With current health proposals expected to cost around $100 billion a year, there would be plenty of money to spare.

Obama could also borrow a trick from Margaret Thatcher, who used the proceeds from almost doubling VAT to slash British income taxes. A 15 percent VAT would give Obama tremendous leeway to simplify a Byzantine income tax system and to cut rates.

And introducing a VAT need not derail economic recovery. Indeed, if the tax were introduced with a six-month delay it could even provide Americans with an incentive to bring forward spending.

America cannot temporize forever. The aging population will demand both painful spending cuts and tax increases. If the burden is placed on income taxes alone then any increase in rates will be monumental.

When politicians finally confront the looming fiscal crisis, a VAT would be an invaluable tool.

Comments

China charges a VAT of 17% on our goods. We charge them zero.
France charges 19.6%. We charge zero.
Mexico charges 15%. We charge zero.
Canada charges 6%. We charge zero.
Does anyone see a pattern here?

Is it any wonder that we only export $1.4 Trillion but import $2.2 Trillion.

Free Trade isn’t free. The VAT functions like a tarrif on imports and everybody charges one except us.

Posted by Chris in KY | Report as abusive
 

/this is inane. I can not fathom the cheating that must go on with VAT. And let’s consider the bureaucracy too – if they’re stuggling with the cash for clunkers imagine a tax on everything we buy. Scary. This should cause massive protests. Tax the rich, fairly – leave room for capital gains -and spend responsibly. Reverting to an entirely different system we don’t have time for please.

 

yes, lets tax the imports!! Excellent idea ! It is only fair ! Come on …. thats why we have a problem to begin with. Unfair trade.

Posted by kevin demay | Report as abusive
 

Repeal the Bush tsx cuts. Raise the rates on the super wealthy. Problem solved.

Posted by Mark | Report as abusive
 

Various responses to points others have made:

*Free trade is not what made this country.
Mercantilism is what made us the power. China is running the mercantilist playbook as we speak.

*The VAT would be much harder to cheat on than the other taxes. It is much easier to manipulate profit than to conceal revenue.It would require collaboration to hide from the VAT. While right now, American Corporations are moving to Bermuda or the Caymans or Asia to avoid U.S. Corp Taxes.

* It is crazy embedding our taxes into our goods only to have them get taxed again when they get to their foreign destination. It is even crazier to allow imports to come and be put on the shelf tax free next to their American competitors.We get whooped on trade coming and going.

* A National Retail Sales Tax would be much easier to cheat at than a VAT.

* The reason that totally abolishing the income tax won’t work is that it would benefit the super rich the most. A CEO who makes $30 Million makes 750 times what a schoolteacher makes $40K or 600 times what a nurse makes $50k. Yet all 3 are taxed about 30% when you factor in state, federal, and local. This would cut the CEO’s
overall tax burden below these people.

Posted by Chris in KY | Report as abusive
 

The USA has already taxed its people into the dirt with very high income taxes (meaning taxes on income, including wages, not just “income tax”) in comparison to the rest of the industrialized world. Now let’s pile on and take more from the working people and the poor so we can promise them more benefits they have already been promised and charged for. And then maybe we can invade four countries at once instead of just two.

Until our “leadership” that has diverted social benefit taxes from their dedicated purpose (i.e. Social Security and Medicare) is held to PERSONAL account, we will never be able to even dream about getting anything from our government except more tax bills.

What we need is to give all Federal lands and buildings to a Social Security / Medicare Trust and make the government pay market rent. We can also charge an Excise Tax on the export of arms, payable ONLY to the Trust fund. In gold.

Posted by Mike L | Report as abusive
 

It is incorrect that we are the only country not taxing consumption. I pay 8.5% sales tax where I live and there is a similar sales tax in most places in the US. Sales tax is on revenue – on everything.

The European countries charging 15%-20% VAT others here have pointed to
- do not have any additional sales taxes
- tax the VALUE ADD and not the sale $, i.e. when you buy a used car your VAT = 0 (because there is no value add) and not 8.5% of the sales price
- have exempted products of daily consumption from VAT, such as food, personal care products etc.

It is also incorrect that a tax system favoring consumption taxes levied with a VAT is easier to police. It is in fact much harder because it has to be done in person and on the ground. I have lived in such a system. The key behavior it drives is to avoid paying VAT by avoiding the transaction on the books of a business. This creates a huge black market and bartering system for all Services that can be provided person to person. And a whole rathole of laws dealing with when it is lawful to provide a service to another person for free. For example my brother and my uncle as electricians are allowed to fix a problem in my house in their free time but my cousin could be prosecuted for tax evasion.

It it is a particular source of pride for each homeowner when he can say that he has not paid once cent of VAT for his entire house because each service was provided as a “personal favor”. In fact it has become so much of an obsession that it rivals football as the national sport. Of course, you have a huge army of tax and customs people policing people’s homes and builder’s construction sites after hours to make sure that all people working there are really blood relatives of the property owners.

The good thing in that is that it provides a huge opportunity for people to bond an nourish their relationships and build community. Nevertheless I am really skeptical the people in this country would easily and readily adapt to that.

Posted by Don Camillo | Report as abusive
 

Not surprising suggestion coming from a right-wing Bloomberg media type. The drumbeat by the rich to shift more and more of the tax burden onto the middle class and working poor continues. The rich already pay far less as a percentage of income in total taxes (property, income, sales, etc and hidden taxes) than do everyone else despite the false propaganda put out by right-wing media types. A lot of people are fooled or choose to believe the propaganda because its what they want to hear.

Posted by Tony R | Report as abusive
 

The people who will attempt to cheat the VAT system are the same people who attempt to cheat now. The landscaper who does not report all his yards for instance. If you don’t report transactions, you can cheat either system (unless you get caught). Although the landscaper would still be paying into VAT when he buys gas or work gloves or a lawn mower.

Drug Dealers, illegal aliens, and prostitutes who cheat the current income tax system might not charge VAT for their illegal services but they would pay VAT on a big screen TV at Best Buy and shampoo at Wal-mart and a box of cereal at the grocery store.

Those IRS agents would be freed up to enforce VAT (on the ground) if we got rid of the 10% and 15% brackets. 60% of the population could use the 1040-EZ form. More individualized IRS attention on businesses.

The same people who barter away services can do that under the current system. The truth is that these multi-national corporations and retail stores are not going to jeopardize their livelihoods over this tax that is passed on to the customers.

The importers and outsourcers are getting a free ride.

Posted by Chris Sherritt | Report as abusive
 

Whenever there is a tax there will be a inefficient way of redistribution of wealth to the rich and what it becomes waste. No VAT and by the way get rid of government guarantee pension. Get rid of worker union.

Posted by seekingworldlywisdom | Report as abusive
 

Reply to Aleks
Running a small business in the UK I understand very well how VAT works and I agree with much of what you say in both your major posts. The only further point I’d like to make is that I love your taxes, whenever I come to New York I buy as much camera gear as my wife lets me, safe in the knowledge that the great American tax payer is subsidising me way more than s/he realises. Now go do the math, as I thing you say.

Posted by Clive S | Report as abusive
 

Ever hear of the Fair Tax, sponsored by hundreds of U.S. Congressmen? Duh.

For some reason we can’t get the democrats off their rears to support it even though it exempts the poor from paying sales tax.

Posted by Bryan | Report as abusive
 

The FairTax would reduce taxes on the poor and raise them on the middle class. A huge tax cut would go to the super-rich (millionaires and billionaires). These people make are overpaid already.

I bet if someone supported a half Fairtax. Say a 15% exclusive rate (or 11.5% inclusive) that replaces the payroll taxes and corporate taxes but not the income tax. The Democrats would support it.

It is also very difficult to enforce a FairTax. A VAT is harder to cheat at because it requires collusion from raw material suppliers and manufacturers/wholesalers and retailers. One business can only cheat on their added value. They can’t get the rebate on the previous added value if they don’t claim their own. Not only that but their purchases would reveal if they were cheating.

Another overlooked option in all this would be a tarrif.It worked well for the first 120 years of the country. We could replace the payroll tax with a 50% tarrif. Could other countries retaliate? Sure. But the demand curve for the things that we export is very inelastic. Food and weapons and scrap metal are viewed as necessities and a tarrif would not hurt these 3 major exports at all. Plus workers would get a 7.65% pay raise and employers would get a 7.65% tax cut when they use labor.

90% of our economy is domestic – only 10% is exports. Our trade deficit is about 90% of our problem.

Posted by Chris in KY | Report as abusive
 

Christopher Swann is right.

Money should be out of the hands of ordinary citizens and in the hands of government, banks and insurance companies, who know best how to manage them.

Posted by Drew | Report as abusive
 

I just can’t understand how replacing a 9% sales tax with a 23% (which is really 30% or more) “Fair Tax” or a similar VAT makes any sense.

Since poor people spend all their income on consumption, this seems like a terribly regressive burden. Rich people have some to save. Since 50% of consumption is done by the top 20% of incomes, wouldn’t such a burdensome tax reduce their demand and shrink the economy even more?

Also, this discourages saving, since my lifetime of saving after-tax money means that I would be heavily taxed on consumption when I actually do spend this money in my old age. How’s that for double taxation? No, thanks.

This is the worst idea imaginable.

Posted by Laocoon | Report as abusive
 

The currently high US Federal Deficit was cause by WallStreet. Let them pay for it by charging a tax on all financial transactions(Tobin Tax). The VAT tax is a non-starter, there is no way the states are going to allow the Federal government to muzzle in on this tax by competing with the state sales tax. The states have their deficits to pay off too!

Posted by DR | Report as abusive
 

Any tax, which yields more money for government, will in turn, provide more resources to a government, which will use these resources to create more taxes. Like an obese person, the government should be on a high protein diet and weaned off other people’s money – our money.

P.S. Why do I feel I’m helping Reuters staff to produce more of this drivel?

Posted by Drew | Report as abusive
 

Reply to Laocoon.
You’re right that saving under a high income tax regime and spending under a high comsumer tax regime is not a good deal. This is a transitional problem which needs to be addressed through interim tax allowances but it should also be be remembered that retirees and the poorer sections of society spend a higher proportion of their income on food and other essentials. In most countries operating VAT these goods are zero rated, i.e. no tax is payable.
VAT is a replacement for Sales Tax and a slice of Income Tax. It moves spending power from Government to people, if you’re having a difficult month not spending means not paying taxes unlike Income Tax which comes off whatever your problems. If government sees VAT income reducing they have to sit up and think because that means something is happening in the real economy. If income tax reduces who knows until its too late. My politics are old fashioned Reagan and Thatcher believe me VAT is not a socialist conspiracy.

Posted by Clive S | Report as abusive
 

A new tax?! Are you fucking kidding?! How about cut out wastefull spending of the taxes we already pay too much of!Anyone making more than 200,000 a year needs to be fired. too many people make way more than they need while doing nothing….. A new tax!? How about a new Country,,, that is why the US was started in the first place,,to get away from over taxation and being told what to think and believe… What the fuck happened?!?!?!

Posted by Mark | Report as abusive
 

And just for the record,,I rent,,and do not even make 35,000 a year.. Value Added Tax? What exactly does that load of horseshit mean? And look at social security,,that was supposed to be for the people who worked, for their retirement,,but it has been taken from, and abused by the government…… I want my SS back!! All I have paid in from my paychecks,,I want it in one lump sum,,it was money I worked for,,but the US Gov. stole.. Thieves!!!!!

Posted by Mark | Report as abusive
 

“The cell phone working” …

Now that’s funny!
(Laughing to hard…can’t type).

Posted by weezer | Report as abusive
 

What a minute, is this instead of the income tax or along with the income tax? If it’s instead of, I’d say it sounds great. If it’s in addition to, I’d ask if these people are nuts? The American people are overtaxed as it is. Adding more taxes is just going to push us from recession to depression.

Posted by Frank | Report as abusive
 

If the US issues a VAT then it also needs to do away with income tax. It also needs to do away with all of it’s very poorly run programs and instead take a position of referee.

That is to say that rather than actually running programs like education and medical programs, and housing programs etc.. It needs to institute a financial social safety net which distributes assistance payments to the citizenry. It would be much like continuously receiving stimulus payments. They wouldn’t amount to very much for each household, but it would serve to smooth things over during difficult times.

Then the government simply needs to uphold standards of ethical business practices, and the rule of law. And in all law it is the citizen that must come first. No more special interest groups. EVERYONE has the same rights. Gay, straight, man, or woman, it doesn’t matter. All citizens have the same rights to life liberty and pursuit of happiness.

On the surface this may seem like it would be very expensive. But in actuality it would cost much less than what the government currently pays for corporate welfare and the administration of its entitlement programs. With what our war is costing us alone this plan could be easily carried out for decades.

The advantage of putting money directly into the hands of the citizenry is that they will be encouraged to consume, pay bills, choose their own medical care, schools, etc.

Our money is backed by faith alone. If one is going to have faith in something, then that something actually has to come through in a positive way. Otherwise why would anyone have faith?

If you want the forest of American business to grow strong then the roots of that forest must have the water they need. The citizenry are the roots of American business. Capitalize the citizenry. Then even if all they do is buy cheetos with their money they will still be supporting the economy. And as long as they are capitalized they will continue to support the economy.

Posted by Benny_Acosta | Report as abusive
 

VAT is important because it offers a restriction to the prices of products. It there was no VAT applied, then it may lead to price rise. So a certain amount of money is to be paid to the government in the name of VAT. For more information on VAT – especially the new EU VAT change to the place of supply for electronic services – just visit http://www.taxamo.com/

Posted by Markerden | Report as abusive
 

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