The prospect of the enactment of a value-added tax in the United States is getting closer five years and counting, according to a Tax Governance Institute survey.
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More than half of the senior business executives surveyed by TGI expect some type of value-added tax to be introduced in the United States within five years. In fact, 57 percent of the executives in the survey said they believe VAT legislation will be introduced within five years, while 18 percent expect it within 10 years.
The huge increase in government spending coupled with diminishing sources of revenue makes it increasingly likely.
The survey responses underscore a recognition that the short-term and long-term outlook for the U.S. fiscal deficit is bleak unless some combination of spending cuts and additional revenue is implemented within the next decade or sooner, said Hank Gutman, KPMG tax principal, director of the Tax Governance Institute, and former chief of staff of the U.S. Congressional Joint Committee on Taxation.
The United States is the only G-20 country without a federal VAT or Goods and Services Tax. The executives we surveyed clearly believe that VAT legislation is likely to be proposed as a means to raise much-needed revenue to reduce the deficit, Gutman said.
The VAT, which has been around since the 1950s, is a tax that is applied at each level of production. Every person or entity that adds value to a product pays tax on the amount of the increase in value, and recovers a VAT credit on the cost of materials and services utilized to add value.
There are a number of factors that make it particularly attractive to governments in need of increased revenue. First, they get their money upfront, since it is paid at each stage of production, with the burden on the taxpayer to go back and get a credit. Second, because of the need to go back and get a credit, there is a self-enforcing aspect to it compared to sales taxes, which inspire widespread cheating and evasion. And the tax is more or less invisible to the ultimate payer of the tax.
Detractors note that the enactment of a VAT would negatively affect the ability of states to increase their revenue by raising sales tax rates, and, since it is a regressive tax, would hit low- and middle-income taxpayers more severely than those in the top brackets.
Proponents suggest dealing with its effect on poorer households by mechanisms such as rebates through the income tax system.
Yet even as the likelihood of a VAT increases, its opponents are organizing to make their opinions known. The Center for Freedom and Prosperity Foundation, along with 21 other groups, has written President Obama, Treasury Secretary Geithner and Congressional leaders about the fiscal and economic risks of a VAT.
Calling itself the Coalition for Tax Competition, the group examined what it called the failed history of VATs in Europe, and found that VATs have traditionally been associated with large increases in the overall tax burden and the level of government spending.
The United States should not repeat the mistakes of Europe, the Coalition concluded: Bigger government and higher taxes would mean sluggish economic performance and lower living standards.