Deficit Commission Ignores VAT in Proposal
The president’s deficit reduction commission last week released their plan to restore fiscal sanity to the nation, but failed to include one of the most effective measures to reduce deficits, encourage savings and export-led growth.
Conspicuously absent from the report was any mention of a consumption tax, or value-added tax, which is used in over 150 nations around the world.
The U.S. is the only developed nation in the world without some form of a consumption tax. For those nations with a VAT, it works like an export subsidy and an import tariff at the same time. Without its own VAT, the U.S. is placed in a comparatively uncompetitive situation.
According to some estimates, a value-added tax of just 7 percent would cover the projected $1 trillion budget shortfall in 2020.
Both co-chairs of the bipartisan commission had floated the idea of recommending a VAT prior to the final report being released. In the end, however, they chose to simply tweak the already convoluted tax code. But, a VAT could have achieved that goal to an even greater degree, potentially freeing millions of Americans of the federal income tax burden.
The Virginia Tax Review estimates that a VAT of 25 percent could pay for health care reform, exempt millions of American families from income taxes and still raise the revenues necessary to cut into the federal budget deficit.
Michael Graetz, a Yale University law professor and author of 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States, says such a plan would lower taxes for each and every tax bracket and could allow taxpayers to exempt their first $100,000 from income taxes each year.
Because the tax is considered regressive, there could be exemptions provided for necessary household items as well as subsidies for low-income Americans.
The retail industry, which lobbied heavily against a national consumption tax, for fear that it would cut into profits as people began to spend less and save more, cheered the decision to leave a VAT out of the plan.
“This proposal appears to be a clear indication that a VAT will not be included in the deficit commission’s final recommendations,” said Matthew Shay, president of the National Retail Federation. “This is good news for the US economy and American families because a VAT would cost our nation hundreds of thousands of badly needed jobs and lower the standard of living for most working Americans.”
The fact of the matter is that an economy built almost entirely on consumer spending is unsustainable. Increased savings rates among individuals and government is absolutely necessary to put the economy on more stable ground in the future, and a VAT would be the easiest, most efficient and least painful way to achieve that goal.