James Pethokoukis

Politics and policy from inside Washington

How America might get a VAT of its own

April 6, 2010

When will the other chaussure drop? Now that America has gone French (and German and British) with universal healthcare, expect Washington to eventually propose a European-style, value-added consumption tax to pay for it — as well as the rest of the historic rise in federal spending. But U.S. voters are in a severe anti-tax mood. It might take another financial crisis to give politicians the will and hubris to ignore them.

Here’s how it might all play out:

1) For Washington insiders, it’s a matter of “when” not “if.” Politicians and economists I chat with from the White House to Capitol Hill to the Federal Reserve think a VAT inevitable. Healthcare reform has only hardened that consensus. Spending cuts to pay for expanded coverage may not happen. Either way, the budget numbers scream for action. Annual federal spending as a share of GDP will likely outpace revenue by at least six percentage points for years to come. Trillion-dollar deficits the norm.

2) Just slashing spending is one option. But that would require a radical reshaping of social-insurance schemes as outlined by Rep. Paul Ryan in his recent white paper, “A Roadmap for America’s Future.” The war over healthcare would seem a minor skirmish by comparison.  A battle worth fighting, but a coalition of the willing might be small.

3) Maybe a broad income tax increase? So far Washington has shown an appetite for nicking only the rich. And one study suggests the tax burden on wealthy households is approaching — or has perhaps even exceeded — the revenue-maximizing level. That’s right, America is on the wrong side of the Laffer Curve again. Even assuming the rich wouldn’t flee to tax shelters, top income tax rates would need rise to economy-crushing levels to balance the budget.

4) Anyway, it’s smarter to tax consumption broadly rather than work and investment narrowly. Especially in an economy that needs less of the former and more of the latter. And that is what a VAT does. Few doubt its ability to raise massive amount of revenue with fewer disincentives than the current system. But if the economics are clear, the politics are a puzzle in Tea Party America. VAT proponents assume political intransigence without a financial crisis to spur action, just as market chaos helped get the $700 billion bank rescue passed in 2008.

5) Yet there is a reasonable scenario where America would accept a VAT. In fact, it is the only scenario under which we should accept a VAT.

First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)

Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can’t be an add on.

Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.

Fourth, the intended tax burden should be kept level at first. A pro-growth VAT — one that does away with corporate and investment taxes — might produce more revenue merely by expanding the economic pie.

Still a tough sell. Better skip the part about the French.

Comments

One difference between the US and Europe is that VAT is not on top of (in my state) a 10% existing sales tax. It is indeed a good idea, but, as you allude to, only if it replaces existing income (and sales) taxes.

Posted by PW | Report as abusive
 

I’ve been in favor of replacing the income tax with a national sales tax for a long time.

People would probably miss their refund, though.

 

We totally need a VAT tax if we are not going to tax the record Wall Street bonuses much higher

 

Anyone who thinks this Congress will replace the income tax with a VAT is an idiot. They’d want BOTH!

Posted by GarandFan | Report as abusive
 

Absolutely! I am all for paying more in taxes! as a matter of fact, why not just take 100% of my earnings! Yesireee, i don’t mind living on dirt, in a cardboard box down by the river. Just as long as elected Democrats can live high on the hog and spend the country into oblivion.

You will get my “thank you note” on election day Democrats

Posted by Road King | Report as abusive
 

Yea, they definitely are not talking about replacing ANY CURRENT TAX. It will be in addition to the taxes we currently pay!

It would be ok if it were to replace the current tax system. But our greedy reps in Washington are all about taking more of our money to REDISTRIBUTE it to the non working, hand out begging, low lifes of this country.

But hey, Elections do have consequences!

Posted by Bill | Report as abusive
 

I was a buyer for a Los Angeles based manufacturing and a VAT tax would send that business overseas. For there was great stress in the margins of keeping that business profitable

Posted by Marie | Report as abusive
 

The problem — even if the VAT were originally passed as a replacement for income and investment taxes, it’s a guarantee that the endless governmental desire for money would result in the income and investment taxes being reimposed later, first just on the “rich” in the name of fairness, and then on everyone. Name one country with a VAT that does not have an income tax.

Posted by Mark | Report as abusive
 

“Will and hubris to ignore them”? Are you mad? The United States is a democracy! America still hasn’t “gone European” regarding healthcare. We do not have anything that can be labeled as “universal”. It is not single payer. Such a system failed to be passed by Congress specifically because it was too European.

The only way a VAT is passed is if the Democratic party which currently controls Congress is prepared to render itself as a minority party for at least a generation by imposing it, against the will of the people.

Posted by TheLastBrainLeft | Report as abusive
 

The only way a VAT is passed is if the Democratic party which currently controls Congress is prepared to render itself as a minority party for at least a generation by imposing it, against the will of the people.

Do I detect a snark? Yes, I think I do. And very artfully wrought, I might add.

Posted by Russ was a Californian | Report as abusive
 

Come with me back to those wonderful days of yesteryear, when the only competition the FairTax had was the Flat Tax. Now we also have another thoroughly disagreeable contender in the VAT. Opponents of the FairTax have made the objection that without repealing the 16th amendment, politicians would subject us to a national sales tax on top of the income tax. Fine, we say, we’d like nothing better. So it should be for a VAT as well.

Back in 2006, 83 highly credentialed economists from business, think tanks and universities wrote an open letter to the president in favor of a national sales tax, known as the FairTax. If you aren’t familiar with this plan, you need to get familiar. Several hundred thousand of us see the FairTax as nothing less than the answer to the 3 most pressing economic issues confronting us today. That would be jobs, jobs, and more jobs. 67 members of congress see it the same way.

http://www.fairtax.org

 

You are deluding yourself. A VAT would be the last straw because you know that the clueless government we have would only try to add it on top of all of the other existing taxes. If Democrats don’t want to hold the White House and Congress for the next 30 years or so–they should go for it!

Posted by Ozzie | Report as abusive
 

The only way a VAT could even be considered seriously by a fiscal conservative would be as part of a package that made it effective only upon the effectiveness of the repeal of the 16th Amendment that permits the income tax.

Posted by CatoRenasci | Report as abusive
 

Democrats: taxing and spending us into bankruptcy.

$14 trillion debt. $2 trillion deficits. High unemployment. A president living like Louis XVI.

Of course, it’s all George Bush’s fault!

Posted by Koblog | Report as abusive
 

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