Regardless of who wins the White House next week, taxes will go up. I hate to admit it, but the only way to reduce the US deficit is to raise taxes. We’ll never grow our way out of themorass, and severe austerity will only generate more economic misery while merely chipping away at the problem if defense and entitlements spending are relatively untouched.
Obama, Romney and their policy advisors know this, and they are aware that a Value Added Tax (VAT) raises a stunning amount of money. The base for a VAT (the total amount of goods that would be subject to tax) would range from one-third to one-half of US GDP. A 10 percent VAT with a relatively broad base could raise $750 billion a year, enough to pay for about a fifth of the federal budget. This would make room for cuts in other taxes.
A VAT is much less visible than an income tax – individuals don’t have to file an annual return for it – so a tax that is paired with income-tax cuts would be the most politically palatable, especially if it is phased in.
The VAT offers an opportunity to expand the tax base. I don’t believe it will ever be politically feasible to abolish the most expensive and popular income tax deductions, such as mortgage interest and health care. But the VAT is insidious as it taxes many otherwise sacrosanct goods and services. For example, taxing housing construction (as many countries, including Canada, do) would offset the distortion of the mortgage deduction. Even health-care services could be taxed. And the people behind the Super PACs (both Republicans and Democrats) would be happy because a tax only on consumption does not tax returns on capital.
Early versions of Paul Ryan’s “Roadmap for America’s Future” included an 8.5% VAT, referred to as a “business consumption tax.” In January, Romney refused to rule out a value added tax. Herman Cain’s 9-9-9 tax plan also had a VAT (as represented by the last “9”). The 2012 Republican Platform endorsed a VAT or national sales tax as one possible solution to the nation’s budget problems (but tied this to the delusional Tea Party notion of repealing the Sixteenth Amendment, which allowed for the federal income tax).
The Obama administration is undoubtedly studying the VAT idea because they know that merely increasing income taxes on the wealthy will not generate the revenue required to reduce the deficit while maintaining government social programs. Obama has said that a new value-added tax is “still on the table,” and he thinks value-added taxes are “something that has worked for other countries.”
On a final note, a VAT or National Sales Tax would be paid IN ADDITION to local and state sales taxes, which average 9.6% nationally.
All in all, politicians scare me more than Halloween ghosts and hobgoblins.