National Sales Tax on the Way?

In light of the previous post on shrinking Federal tax revenues (see Federal Tax Revenues Plunge), this piece on a national sales tax is revealing. The Washington Post is often a good source for trial balloon articles put forth by think tanks and politicians on controversial topics [emphasis added below]:

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look (Washington Post, May 27, 2009, Lori Montgomery)

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

“There is a growing awareness of the need for fundamental tax reform,” Sen. Kent Conrad (D-N.D.) said in an interview. “I think a VAT and a high-end income tax have got to be on the table.”

Comments such as this one from Senator Conrad are so predictably one-sided that I hate to point out the obvious. However, into the breach once more I must go.

Why is it that the good Senator from North Dakota thinks tax reform means higher taxes. He wants a national sales tax or ‘value-added’ tax (VAT) akin to that in Europe. He also wants additional income taxes. How is that tax reform?

The Washington Post continues:

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer.

…A White House official said a VAT is “unlikely to be in the mix” as a means to pay for health-care reform. “While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers,” said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book “Health Care, Guaranteed.” Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”

Again, we see the same tired theme — ‘everyone knows’ that our budget problem stems from the need for a new source of taxes. Right.

Cutting spending, even though most Americans wants government spending reduced (see Rasmussen Reports: Americans Want Spending Cuts), never seems to come into the mix.

…The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation’s health-care system will only add to the problem.

…Enter the VAT, one of the world’s most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

Phew. Is the Washington Post really claiming that the VAT is popular in Europe? I’ve traveled in Europe and all I heard were various ways people try to avoid paying the VAT. I believe they meant popular with politicians.

Imagine adding a national sales tax of 21% (Ireland) or 25% (Hungary) on top of the sales tax many states and municipalities already charge. I’m quite positive it would not be popular. The VAT in France is about 19% as it is in Germany. Taxes such as sales taxes are very popular with politicians because they can raise them easily as we recently saw in California.

This piece concludes, with a final sardonic quotation from a VAT advocate:

…Most lawmakers are still looking for “a painless source of revenue” to overhaul the health-care system and dig the nation out of debt, Burman said. “Who knows?” he added. “Maybe the tooth fairy will bring that to them.”

I don’t see a lot of evidence that our political leaders are remotely interested in ‘digging’ us out of debt, but rather what I see is our leaders piling debts on debts. And, spending on spending.

Comments

[J. Crighton:]

I think russ, you have too much faith in our political class. "If it is approached correctly" and "[if it] replaces other taxes" are not words I would use to describe any of the tax policies or actions of our government.

Considering how wonderfull our economy is doing at this moment I doubt raising the price of item with additional taxes is going to spur consumer spending.

But leaving that particular aside, the danger of the VAT is that it seems it can be too easily raised by politicians. How many of our elected officals would you trust to make a hard choice of cutting spending to match income level? I can't think of many, too many would make the easier choice of simply raising that VAT.

Jun 04 08:59 AM

[fireball:]

they do need a new tax source ,as they say, the old source, the u.s. citizens are getting tapped out.
i have a concept that seems simple to me but for some reason the spendaholics can't grasp it. spend less.
how about a tax on anyone that comes up with more taxtion ideas.
talk about taxation without representation. the concept has reached the levels of the absurd.

Jun 04 09:03 AM

[yellowhoard:]

Actually, a VAT would spur spending in the short run as people race to buy things before it kicks in.

Therefore, I predict it will be enacted on Jan 1st of 2011. That way, Congress can announce it early next year and benefit politically from the surge in spending during their re election campaigns.


On Jun 04 08:59 AM J. Crighton wrote:

> I think russ, you have too much faith in our political class. "If
> it is approached correctly" and "[if it] replaces other taxes" are
> not words I would use to describe any of the tax policies or actions
> of our government.
>
> Considering how wonderfull our economy is doing at this moment I
> doubt raising the price of item with additional taxes is going to
> spur consumer spending.
>
> But leaving that particular aside, the danger of the VAT is that
> it seems it can be too easily raised by politicians. How many of
> our elected officals would you trust to make a hard choice of cutting
> spending to match income level? I can't think of many, too many would
> make the easier choice of simply raising that VAT.

Jun 04 10:06 AM

[doubleguns:]

Vat tax to replace income tax and no income levels exempt.

I would have no problem with that since raising it would incite the entire populace.

That might keep congress in check on spending.

One can only dream.

Jun 04 10:50 AM

[doubleguns:]

Vat tax to replace income tax and no income levels exempt.

I would have no problem with that since raising it would incite the entire populace.

That might keep congress in check on spending.

One can only dream.

Jun 04 10:50 AM

[doubleguns:]

Sorry for the multiple posts again. Time to reload the mouse again.

Jun 04 10:50 AM

[TeresaE:]

First, the majority of Americans have NO idea as to the tax structure and taxes we already pay. There are hundreds of excise taxes paid by American manufacturers for the pleasure of staying in business. Many of the items are NOT taxed if imported.

Second, the treasury isn't talking about "reform" or elimination of current taxes, they are speaking of adding a whole new layer to the structure. Grow the IRS and the costs--forever.

More government, more spending, less money left to feed the kiddeos.

Then what, after the "surplus" of taxes is spent (and it will be), then what?

Personal property taxes (like many states force employers to pay)?

Saddest part is, that it no longer matters how much it costs our future, or our current workers, it will only matter to the voters what they are promised in perks & payments.

Democracy doomed to fail when the non-doers figure out they can increase their own standard of living on the doers backs.

I think we are there.

Jun 04 11:17 AM

[sunnsea:]

If VAT is applied in the US as it is in Europe, there will be a major, major increase in revenue from a source you won't expect that is from China...yes, China. Why? Because if we do it the European way, all imports, yes, imports would be subject to the VAT. They don't call it a tariff in Europe, it's a "VAT" but adds 20% to the cost of everything imported when goods cross the dock. US manufacturers could keep on making things in China and pay 20% VAT on their goods coming in here or, as an incentive, have the products made in the US and be exempted from paying the VAT at the finished stage of production and also exempting exports made in the US from the VAT. This would have the effect of turning the US into one large free-trade zone and become a manufacturing jobs producing engine. Coupled with an overall national industrial strategy that would emphasize math and science education, we become a national powerhouse of engineers and scientists turning out new products with a high degree of automation not relying on cheap labor that are made in USA.

Jun 04 11:35 AM

[OldNavySailor:]

Another example of lies and deceit put upon American citizens. The only "value added" for this nefarious national tax is the continued financial support of a corrupt and self-serving government. Once the politicians open the door and force the states to collect a national sales tax there will be no end to the legislated theft of your money. I don't care if other socialist governments in the world collect a consumer tax (including Canada); all taxes are an abuse of individual liberty.

To think some of the posters on this topic support a VAT is incredulous. Maybe we should allow government to nationalize the majority of private business and become a pseudo-communist state like the business model embraced by China?

What the hell is the matter with you people? Are you free market capitalists or communists?

I support a REDUCTION in all forms of income tax; a REDUCTION in regulations that burden business with unproductive paperwork, reporting procedures and unnecessary expense that only benefit the public employee.

America needs a re-growth in private enterprise to spur employment, not more taxes. More political interference to favor one group of voters over another will destroy your wealth, steal your property and weaken you freedoms as Americans.

Show some backbone; show some outrage; show some courage and speak out against this blatant tyranny of enslavement!

Jun 04 12:12 PM

[sunnsea:]

Your taxes paid in Canada vs US do not account for high property taxes in the US usually based upon the great variation in the quality of school districts. Also, Canadians are covered whether they are employed or not and also pay into the health system. For example about $100 for a family of four for complete coverage, no b.s. from private for-proft insurers like co-pays and deductibles. In other words, you get what you pay for. Here in the US taxes are a shell game in which the rich rob the middle class and if anyone dares complain, it's class warfare. Income taxes of 90% on incomes of $3.2 million would take care of overpaid rock stars, sports figures, movie actors, CEOs of health insurers and leveraged hedge fund mangers pretty quickly. These are your societal parasites and they should be taxed accordingly. We had a 90% tax rate until 1963 and a 75% rate until around 1983. From 1933 to 1983, there weren't any bubbles in real estate or stocks, get it?


On Jun 04 07:44 AM conceptwizard wrote:

> The VAT is commonplace in most other countries. Canada pays a GST
> (Goods & Services Tax) 6% on all non essitial items, + 7% = 13%
> provincial tax in some provinces (exception Alberta) It is amazing
> what the Government considers to be non essential. You buy a car
> its 13%, you sell a car the next person pays 13% and so on. One car
> can be taxed several times. Ben laid it on the table in Congress,
> tax people cut spending or both or were screwed, it was plain. On
> top of that Canada pays a tiered income tax system. 25 % on income
> up to $35,000, 38% up to $70,000, 42% up to $100,000 and 48% over
> that. Their is also tax of about 50 cents a gallon on gas. The total
> taxes paid by an average Canadian works out to paying taxes until
> June 10 each year and you keep the rest of the year. Thats the cost
> of running a balanced budget (Was Balanced & a surplus until
> this year) and paying for a free Medicare system.
> The GAO David Dodge said that in order for the USA to pay for all
> its committments on programs (medicare, Social Security included)
> income tax would have to be 67%. That does not leave much to eat
> with let alone drive or go to the Mall.
> I am going to make a prediction that the Government will have no
> choice but to lower the standard of living via a tax net of some
> sort to avoid total collapse. Politically this is suicide and Congress
> will be very reluctant to do it, if they dont there is no hope unless
> major programs are eliminated or military spending is decimated.
>
> Another difference in these countries in that in an Federal election
> the cost is born by the taxpayer, with so much being allocated to
> each party depending on their ownership of seats. This virtually
> eliminates lobbyists and donations from Financial Institutions and
> other powerful firgures eliciting favors. That is why the US is bailing
> out the banks, politicians have to for campaign future funding purposes.
> Obama is not all that meets the eye, the 700 million dollar cost
> for campaigning came largely from these institutions. Get ready to
> pay more to have less. Generationally speaking. The other driving
> force would be to send a clear message to US creditors that they
> are doing more to secure their assets. Remember the easiest place
> for the Government to get money is from our wallets.

Jun 04 12:55 PM

[atlasman:]

There is no way Congress will do VAT plus Income Tax as the politics will be impossible to overcome. If Obama/Pelosi/Reid pushed this plan Republicans would destroy them in the 2010 election and they know it. A VAT replacing income is equally impossible as the liberals would scream about how regressive it would be. So the end result is no change with a blowup coming soon.
-AM

Jun 04 01:35 PM

[Chancer:]

I have been saying for a long time that Obummer (and many Dems) plans a VAT tax, but not until his second term. Obummer has said that he ONLY wants to increase income taxes on the rich. There just is not enough there to pay this debt. But the Dems appear to have little concern about the deficit while they are limited by assurances that they do not want to raise taxes on middle class. Major increases in corporate tax rates are alaso unpopular. I believe they have had a secret plan for the VAT tax for some time.

The VAT will increase the cost of living for U.S. consumers by increasing the cost of all manufactured products. They may or may not include services. The operation of the VAT is to add tax at every level where value is added. Add up all the VAT increments and you can have total cost increases of 10% to 50%. Politicians will have a huge "money pot" by constantly adjusting rates and products and services taxed.

The VAT is also a hidden tax and confusing (hard to understand) for the general public. It is "heaven on earth" for tax and spend politicians. And, as liberals will love, it makes us more like Europe.

In operating the VAT, governments generally exempt exports and tourists. In theory, this can make U.S. manufactured products less competitive with exports, and may cause further declines in U.S. manufacturing by driving manufacturing for U.S. comsumption offshore. "Bye bye" auto plants of Japanese auto companies and those jobs.

I lived in a third world nation where new manufactured goods were hard to get (sometimes waiting months for import orders) and very expensive. This encouraged thriving small repair businesses to repair and rebuild used goods. This might happen here.

A national sales tax to totally replace the income tax and also possibly including payroll taxes (social security and medicare) is a reasonable change. But the current or higher income tax plus a value added tax is a guarantee of ever increasing taxation, decline in living standards, more job losses, and a total decline of the USA.

Jun 04 01:59 PM

[woodsey:]

Certainly a decent health care system must be paid for. Does anyone believe the American people have the guts to do it? does anyone believe their government has? No they have guts, but that's for things like firing auto executives and beating up on people overseas.

Jun 04 03:58 PM

[optionsgirl:]

You bet, so long, IRS! it'll never happen.


On Jun 04 10:50 AM doubleguns wrote:

> Vat tax to replace income tax and no income levels exempt.
>
> I would have no problem with that since raising it would incite the
> entire populace.
>
> That might keep congress in check on spending.
>
> One can only dream.

Jun 04 04:42 PM

[PainfullyAware:]

Amen - I Concur !!!

Slavery Does Not Always Involve Shackles.

If more people actually attempted to run a business and comply with all the Bureaucratic Mandates they would understand your insight.


On Jun 04 12:12 PM OldNavySailor wrote:

> Another example of lies and deceit put upon American citizens. The
> only "value added" for this nefarious national tax is the continued
> financial support of a corrupt and self-serving government. Once
> the politicians open the door and force the states to collect a national
> sales tax there will be no end to the legislated theft of your money.
> I don't care if other socialist governments in the world collect
> a consumer tax (including Canada); all taxes are an abuse of individual
> liberty.
>
> To think some of the posters on this topic support a VAT is incredulous.
> Maybe we should allow government to nationalize the majority of private
> business and become a pseudo-communist state like the business model
> embraced by China?
>
> What the hell is the matter with you people? Are you free market
> capitalists or communists?
>
> I support a REDUCTION in all forms of income tax; a REDUCTION in
> regulations that burden business with unproductive paperwork, reporting
> procedures and unnecessary expense that only benefit the public employee.
>
>
> America needs a re-growth in private enterprise to spur employment,
> not more taxes. More political interference to favor one group of
> voters over another will destroy your wealth, steal your property
> and weaken you freedoms as Americans.
>
> Show some backbone; show some outrage; show some courage and speak
> out against this blatant tyranny of enslavement!

Jun 04 08:44 PM

[Bobco23:]

The really great thing about the VAT tax is that the Osama voters are going to bear the brut of the total tax package increase. The productive people are already carrying the tax load. With VAT, the free riders get to join the misery in a major way. Sweet.


On Jun 04 08:22 AM russ wrote:

> I like the simplicity of the VAT and the fact it is figured in the
> price of an article. Having traveled in Europe many times, I think
> it is more up front than the phoney "on sale for $ 9.95" when the
> full price is much more when you add the tax. There is no need to
> be in a panic. If it is approached correctly and helps replace other
> taxes it could be a thoughtful improvement. However, in the USA,
> and in most Seeking Alpha columns, right wing knee jerk reactions
> seem to be the norm

Jun 04 10:33 PM

[milkchaser:]

On Jun 04 12:55 PM Sunnsea wrote:

> Also, Canadians are covered whether they are
> employed or not and also pay into the health system. For example
> about $100 for a family of four for complete coverage, no b.s. from
> private for-proft insurers like co-pays and deductibles.
Canadians only pay $100 (is that per year? per week? per incident?) If Canadians pay only $100, is $100 the total cost? If not, who pays the rest? Good health care is expensive. Making somebody else does not make it cheaper, just cheaper for the recipient and more expensive for the payor.

> Here in the US taxes are a shell
> game in which the rich rob the middle class and if anyone dares complain,
> it's class warfare. Income taxes of 90% on incomes of $3.2 million
> would take care of overpaid rock stars, sports figures, movie actors,
> CEOs of health insurers and leveraged hedge fund mangers pretty quickly.
> These are your societal parasites and they should be taxed accordingly.
Class warfare! Seriously, the rich pay most of the taxes already. If you think otherwise, you have not done much research. Or are you being sarcastic?

> We had a 90% tax rate until 1963 and a 75% rate until around 1983.
> From 1933 to 1983, there weren't any bubbles in real estate or stocks,
> get it?
We also had higher rates of heart disease and various cancers. What does one thing have to do with another? High tax rates do not prevent or correlate in any way to real estate or stock bubbles.

Jun 05 11:05 AM

[milkchaser:]

Before considering any major tax reform, whether VAT or flat or fair tax, we need spending limits. We need constitutional spending limits. We almost had a balanced budget amendment but Clinton personally lobbied 4 Senators to switch their votes. If any one of them had voted Yes (as they had in the past when the amendment was voted on), the amendment would have been sent to the states.

I propose the grand solution: No person shall serve more than six years in Congress during which the annual expenditures of the US gov't exceeds revenue. All Federal gov't revenues and all Federal gov't expenditures are counted in the budget (no off-budget items) when calculating budget balance. Budget surpluses in excess of 3% of total expenditures must be immediately rebated to the states in proportion to their relative population.

The beauty of this proposal is that it combines term limits with the balanced budget amendment. The people would be allowed to elect whomever they like, but they would not be able to vote money into their own pockets (for long). We all know that politicians chief concern is staying in office. They would not risk a budget deficit.

Jun 05 11:21 AM

[long roh:]

A national sales tax or VAT seems like a polite way for the government to hand us the bill for inflation. Rather than inflate the debt away (and impose a hidden tax on every purchase via a less valuable dollar), give the bill to the taxpayer upfront whenever a purchase is made. The problem, of course, is enforcement and the indiscriminate nature of those taxes.

How about a real Consumption Tax instead:

A. Tax only five categories: 1) the use of non-renewable energy; 2) mining, fishing, hunting, etc. (the taking of natural resources); 3) the use of clean water; 4) the production of trash or pollution; and 5) capital gains. 1-4 should be obvious, and all can be policed to a higher degree than sales (or at least are more worthy of policing efforts than, say, grocery transactions). 5 is a special case -- the provision of labor should be valued over the deployment of capital, but since labor tax cannot feasibly go below 0%, capital gains tax should be non-zero.

B. Do not tax the purchase of goods or services. Do not tax the provision of labor.

C. Make the tax rates relatively high on 1-4. 5 can be low to moderate, depending on preferences of economic policy prevailing at the time.

D. Support the poor. Maintain/expand generous entitlement programs (e.g. universal health care, food stamps, housing), create millions of "full employment" jobs (pay people to pick up trash, if need be), and provide substantial tax rebates/subsidies for the poor.

Outcome? Consumption that externalizes costs on others will be discouraged. If you consume plastic bottles of water shipped from halfway across the globe, you will pay handsomely for that privilege and, hopefully, heal the public fisc.

Those who are adding value (working, providing services) are not punished for doing so. Those who are using up resources at the expense of all others current and to come, are punished for doing so -- but they are still free to do it.

It's an interesting pipe dream, anyway. The U.S. will have incredible difficulty moving to any tax framework that relies on the absence of income taxes because varying state income laws would upset the equation.

Jun 06 12:42 AM

[Crocodilian:]

Author writes: "Why is it that the good Senator from North Dakota thinks tax reform means higher taxes."

----------------------...

Because you don't "get something for nothing". Americans are under-taxed for the public services that they consume. Your grandfather faced a marginal rate of %90 under Eisenhower, your Dad, paid %70 under Nixon, but what Reagan proved (pace Dick Cheney) is not that "deficits don't matter" -- but that Americans hate paying taxes more than they hate deficits.

Under the Jimmy Carter, US public debt as a % of GDP hit a post WWII low of %30 (with a marginal tax rate of %70).

I doubt that there's the political will to set income tax rates that high again -- and indeed, high marginal rates have some pernicious distortions-- so a VAT appears to be the least distorting means of raising the revenues we need.

Jun 09 01:39 PM