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Is There a VAT in Our Future?

April 22, 2010

As the federal government struggles to control runaway deficits, talk of a value-added tax has been gaining both supporters and critics.

The Obama administration has organized a commission that is scheduled to begin meeting next week to come up with a set of suggestions for reducing the deficit. One of the proposals that is expected to be debated is the levying of a value-added tax similar to the kind imposed in Europe and many other parts of the world. However, the White House has denied that Obama plans to advocate a VAT, which has become a Republican talking point in recent days.

“This is not something the president has proposed, nor is it under consideration,” White House press secretary Robert Gibbs said, according to the Washington Post.

The buzz about the VAT arose after influential economic advisor and former Federal Reserve chairman Paul Volcker spoke favorably about the VAT earlier this month. However, lawmakers want to head off the possibility of a VAT, and Sen. John McCain, R-Ariz., introduced a nonbinding resolution last week that declared the VAT to be “a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery.” The amendment attracted bipartisan support, garnering 85 votes in the Senate.

But the VAT also has its proponents. At a lecture Thursday at New York University Law School on U.S. international tax and VAT reform, sponsored by KPMG and NYU, speakers talked about the advantages and disadvantages of the tax, and how it might work in the U.S.

Yale Law School professor Michael Graetz, author of the book “100 Million Unnecessary Returns,” advocated the concept of using a debit card to figure the VAT at the cash register. The debit card could store information such as the various exemptions to which a taxpayer might be entitled. He expects the VAT to be adopted at some point, but admits he doesn’t know when. Graetz believes it will depend on the bond market and when overseas investors tire of buying Treasury bonds.

He noted that much of the rest of the world is using the VAT in one form or another, or moving to adopt such a tax. “We are an outlier,” he said. A map provided by KPMG shows only the U.S. and parts of Africa as not having a VAT.

KPMG managing director Harley Duncan noted, however, that many states and localities would be opposed to the VAT as it would reduce the authority of lawmakers to decide which sales taxes to impose on which items at certain rates. On the other hand, a federal VAT provides federal enforcement power, in the form of the IRS, for collecting taxes that would ultimately be distributed to states and local governments, and that could be appealing to state and local officials. However, Duncan described several alternative models under which states could continue to collect their own retail sales taxes or impose their own form of a VAT in conjunction with the federal VAT in a kind of “piggy-back” arrangement.

Piggy-back or piggy-bank, the challenges of implementing a federal VAT, and getting state legislatures to go along with it, would be daunting, especially at a time when many state lawmakers are already complaining about unfunded mandates from the federal government and the loss of state sovereignty.

Comments (1)
Validating Republican talking points that do not hold water with the Obama administration nor with the Democrats on these committee's and the article today with a headline saying President Obama DEMANDS banks cooperate with his proposed changes seems too political for this organization.

I would think this organization would choose to stick to facts and not polarize some of us with editorial type of commenting.

I would like to be assured that articles I read here are laced with facts not arsenic.
Posted by dtaylor | Friday, April 23 2010 at 12:00PM ET
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