National Sales Tax Gets Fresh Look

Washington Post: Once Considered Unthinkable, Some Now View A U.S. VAT As A Way to Reduce Deficits, Fund Health Reform

(Washingtonpost.com)  This story was written by Washington Post Staff Writer Lori Montgomery.

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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."

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. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off -- maybe. Or you could pay for it progressively and they'd come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

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."

Seeking New Revenue

The surge of interest in a VAT is testament to the extraordinary depth of the nation's money troubles. While some conservatives have long argued that a consumption tax would provide a simpler and more efficient alternative to the byzantine U.S. income tax code, this time it's all about the money.

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.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Key lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money -- nearly $1 trillion over the next five years, according to White House budget documents. But options on the table would raise a fraction of that sum. And while it might pay for health care, it would barely dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

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.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.

A VAT's Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.

Sales Tax Gains Momentum

Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he's received a number of phone calls from lawmakers interested in his idea, though "they can't quite imagine how to make it happen politically." Burman said the 25 percent rate has caused some sticker shock, and he's trying to figure out how to bring it down.

Graetz's proposal drew an endorsement from Volcker, who last year called it "a sensible plan for reform." (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama's pledge not to raise taxes on families who make less than $200,000 a year.

"I think interest is quietly picking up," Graetz said. "People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious."

Still, the Senate Finance Committee declined to include a VAT among the options it is considering to pay for health reform. And even VAT supporters doubt the tax will find a place among the tax-reform proposals the Volcker panel has been asked to produce by Dec. 4.

Though the nation's fiscal outlook is grim, Burman said "the situation will have to get more desperate" before lawmakers are likely to consider a new levy aimed directly at the pocketbooks of every one of their constituents.

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."

[Newster1]

Some people like not paying any state sales tax, but if you are honest and good, you know that is not right.
Posted by sjc_1

Skrew that, my money is my money, and to me I am "number one" and come FIRST, not the Govt, not you, not your kids!
That's why I do all I can to retain every dollar I earn and pay as little tax on it as I can. That $100 does me a lot more benefit than it does a fat-cat Govt that wastes 10 BILLION a month occupying iraq alone!

[tazmjam]

This is the wrong time to be talking about VAT; too many people are out of work or hurting economically to even want to consider adding another tax burden to their already tight budget. Once the economy improves (not on paper but when most laid off Americans are back to work) a VAT is worth considering, especially if it would pay for health insurance for all Americans not on Medicaid or Medicare, and balance the budget. The money Obama would like to raise taxing greenhouse-gas emissions is not a good idea, it would eventually disappear if the true point of the tax was to replace polluting industries with eco-friendly ones. The American people might accept a VAT if the economy was in descent shape, health care quality and choice was guaranteed, the income tax disappeared, and congress actually proved they were willing to cut the fat from the budget and stop spending money we don?t have. That would require congress to get rid of the special interest groups and reform campaign finance. It would require them to look out for the interest of the people they represent rather then doing what works best for them and their friends. In a nut shell, it would require congress to do the job they were actually hired to do. I think under the right circumstance the American people are up to the task. I just don?t think Washington is.

[DocD--2008]

If our Representatives in Congress do this, they will be guaranteeing they will not return after the next election. Maybe it would be a good thing, we could have a clean sweep in Congress and start with all new people, then get rid of some of these outrageous taxes.

[impeachbhb]

Obama promised an income tax cut for 95% of us. We all are living in luxury with our extra $13 a week.
He never said he would not raise taxes other than income taxes. Bend over America, you will soon start getting what you voted for. Cigarettes, sodas, sales taxes are just the beginning.
You could tax the upper 5% at 100% and only run the government for about 6 months.

[babooph]

What is left of the US middle class will have trouble paying ANY tax-the rich are not going to pay[their GOD is $ & they intend to keep it}-looks like those who want smaller govt will get their way.

[sjc_1]

I would favor a 5% sales tax for online purchases that cross state lines. More purchases are made online now that ever and it makes sense to pay for the infrastructure costs. Some people like not paying any state sales tax, but if you are honest and good, you know that is not right.

[incog-nito]

Both the Dems and the GOP don't like the idea of a simpler, more transparent tax plan, because it would make it harder for them to slip in a loophole for their favorite special interest groups unnoticed. For all their talk about simplifying the tax code, the GOP did absolutely nothing during the Bush years when they're in power. During their campaigns both Obama and McCain talked endlessly about yet more "tax credits" for this and that, more additions to the already monstrous tax code. Don't expect any change from either party anytime soon.

[jumkey]

----One--American----

Yeah, of course it's you retarded Republicans who bankrupted our county. Who's been in charge for 8 years? Chimpy McStupid and Darth Cheney - an incompetent boob and Hitler's cousin. What next?

You can't find a Democrat even walking on Wall Street - they're all REPUBLICANS.

Republicans are liars, crooks, fools and traitors.

[xtremenortherner]

Have you all(Congress)gone mad!!?? We are not even close to getting back on track after one of the WORST Recessions in US history...,remember the MIDDLE CLASS? The one that does most of the work,makes the most purchases like houses,cars,ELECTED youse guys in Congress and pays its Lion's share of TAXES! Can it possibly sink in just what a catastrophe that would create,if the cost of every item & service would increase by 10%?? People would either start to buy from overseas (like prescription medications already).Manufacturers in general,not just the auto makers,would experience devastating profit losses,farmers would be hurt by rising prices....,sure most of the world has a VAT,but would anyone want to leave the USA and emigrate in order to experience the elusive "Higher Quality of Life" supposedly brought on by better Health care??(What if you're already healthy to begin with?) Aren't we the ones with the "illegal alien problems?" DUH! If Congress even mentions "Tax" and "25%" in the same sentence, the already over-burdened middle class will start a Second American Revolution!! And we'll cast every member of BOTH Houses of Congress adrift in the sea...,just like Captain Bligh!

[wooleywews]

I have an idea. Do not run a trillion dollars over budget. First raise the money through taxation. Then when the money is raised, then start the program. If the America people are willing to pay for a program first then the program should be started. If the America people do not want to pay for the program, then do not start the program. This is too simple for anyone in Washington D.C. to figure out. Our leaders would rather start a program and then force someone to pay for the program.