May 2010

Don’t Add the Value-Added Tax (VAT) to our Tax Burden

by Amy K. Frantz

Is a value-added tax, or VAT, in our country’s future? Paul Volcker, former Chairman of the Federal Reserve and advisor to President Obama, recently indicated that “a VAT… ‘was not as toxic an idea’ as it had been, and that both a VAT and some kind of tax on energy need to be on the table.”[1]  “Congressional Budget Office director Doug Elmendorf told reporters…that his agency is studying a VAT as part of its ‘strategic planning’ for the future – one in which the $1.5 trillion budget deficit and $12.5 trillion debt must be addressed by policy makers.  ‘Many people in Congress are interested in it,’ Elmendorf said, without specifying who.”[2]

It certainly sounds as if some in Washington D.C. are at least floating the idea of imposing a VAT on the United States. President Obama himself “said in an interview with CNBC, ‘I want to get a better picture of what our options are.’”[3]  Those options will be considered by the National Commission on Fiscal Responsibility and Reform, created by the President to recommend options for dealing with the budget deficit and debt – potentially ranging from cutting spending to raising taxes or some combination of the two.  The panel is headed by co-chairs Alan Simpson, former Republican Senator from Wyoming, and Erskine Bowles, former White House chief of staff to President Clinton. Of the 18 commission members, six were appointed by President Obama and three each were appointed by Majority Leader of the Senate Harry Reid, Speaker of the House of Representatives Nancy Pelosi, Minority Leader of the Senate Mitch McConnell, and Minority Leader of the House John Boehner.  Conveniently, the panel’s recommendations are not due until December 1, 2010, well after the November elections.

Will the Commission recommend a VAT? Some members of Congress were sufficiently concerned by the prospect of a VAT that they took steps to show their displeasure.  “The Senate voted 85-13 last week for a nonbinding ‘sense of the Senate’ resolution that calls such a tax ‘a massive tax increase that will cripple families on fixed incomes and only further push back America’s economic recovery.’”[4]  Our own Senators Grassley and Harkin both voted in favor of the resolution and in opposition to the idea of a VAT.  Of course, if the Senate changes its mind down the line, after the November elections, it wouldn’t be the first time a Senator voted for something before voting against it!  In the House of Representatives, Congressman Todd Tiahrt (R-Kansas) has introduced a similar resolution that has not yet been considered.

What exactly is the VAT? “A VAT is levied on the ‘value added’ to goods and services as they pass through each stage of the production process.”[5]  However, it is “not like a sales tax.  When you buy something, your receipt shows the cost of the item and the separate cost of the sales tax that was added on…The VAT is hidden in the purchase price, which makes the tax easy to increase.”[6]  This has been demonstrated by the experience of countries in Europe that have imposed a VAT.  “In the late 1960s, VATs started out as small sales taxes with about a 5 percent average rate.  Today, the average VAT rate in Europe is 20 percent.”[7]  “Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%.”[8]

Supporters of a VAT for the U.S. may claim that this tax is necessary to bring down the deficit and debt. More likely is that the more tax revenue the federal government collects, the more it will spend.  This has also proven to be the case in European countries with a VAT.  “In Europe, average government spending was about 30.2% of [Gross Domestic Product] GDP when VATs began to spread in the late 1960s.  Today, those governments are more than 50% larger, with spending of 47.1% of GDP on average.  By contrast, U.S. government spending (federal and state) rose to 35.3% from 28.3% as a share of GDP in the same period.”[9]

Those that aspire to a European-style tax system for the U.S. should consider that “in 2008, the average resident of West Virginia, one of the poorest American states, had an income $2,000 a year higher than the average resident of the European Union, according to economist Mark Perry of the University of Michigan, Flint. The price of a much higher tax burden to finance a cradle-to-grave entitlement state in Europe has been a lower standard of living.  VAT supporters should explain why the same won’t be true in America.”[10]

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry. 

[1] “Volcker on the VAT,” The Wall Street Journal, April 8, 2010, <http://online.wsj.com/article/SB10001424052702303720604575170320672253834.html> (April 14, 2010).

[2] Richard Wolf, “President’s panel may consider value-added tax,” USA Today, April 8, 2010, <http://content.usatoday.com/communities/theoval/post/2010/04/presidents-panel-may-consider-vat-tax/1> (April 14, 2010).

[3] Charles Babington, “Obama suggests value-added tax may be an option,” Yahoo! News, April 21, 2010, <http://news.yahoo.com/s/ap/20100421/ap_on_bi_ge/us_obama_tax> (April 22, 2010).

[4] Ibid.

[5] Daniel J. Mitchell, Ph.D., “Beware the Value-Added Tax,” Backgrounder, The Heritage Foundation, May 16, 2005, p. 2.

[6] Steve Stanek, “Interview: Value-Added Tax a ‘License to Steal,’” Budget & Tax News, The Heartland Institute, April 12, 2010, < http://www.heartland.org/full/27463/Interview_ValueAdded_Tax_a_License_to_Steal.html > (April 14, 2010).

[7] Ryan Ellis, “VAT Facts,” Americans for Tax Reform, April 14, 2010, < http://www.atr.org/userfiles/041310pr-vatfacts.pdf > (April 14, 2010).

[8] “Europe’s VAT Lessons,” The Wall Street Journal, April 15, 2010, <http://online.wsj.com/article/SB10001424052702304198004575172190620528592.html > (April 15, 2010).

[9] Ibid.

[10] Ibid.