With the successful passage of a massive new entitlement program in health care reform, many are deeply concerned about the nation’s national debt, and some believe that in order to rein in the debt, a national sales tax may be inevitable.

On Friday, one of the leading voices on the right, Washington Post columnist Charles Krauthammer, wrote that an American version of the value-added tax is all but a certainty given the passage of health care reform.
   
“With the passage of Obamacare, creating a vast new middle-class entitlement, a national sales tax of the kind near-universal in Europe is inevitable,” he wrote.

Despite favorable scores by the Congressional Budget Office that predict that the bill will lower the federal deficit over the next two decades, many are skeptical and believe that budgetary gimmicks will force the administration to institute an American VAT to avoid financial ruin. 

“The healthcare bill makes the logical case for the VAT stronger, because it’s not clear that Congress will make the difficult spending reductions the bill mandates,” William Gale, an economist with the Brookings Institution, told CNNMoney.com. 

Since there are very few out there that believe Congress has the political courage to raise taxes or cut spending enough to actually reduce the deficit, most experts think that the next most logical step is a national VAT. 

Currently over 150 nations utilize a foreign VAT. For them, it works like an export subsidy for foreign exporters and an import tariff at the same time, which places the U.S. in a comparatively most uncompetitive situation due to the fact that we do not utilize our own VAT or any other countervailing measures.

In 2006, foreign VAT nations collected rebates totaling $218.2 billion while the U.S. was forced to pay $122.4 billion in foreign taxes. Each year the foreign VAT imposes a $290 billion burden on exported U.S. goods and another $85 billion on services. This encourages outsourcing as American companies move offshore in order to circumvent the VAT and reap the same benefits as the companies producing in those nations.  

In 2005, this foreign tax was applied to 94 percent of U.S. imports and exports. In EU countries alone in 2001, the average foreign VAT rate applied was 19.4 percent, coupled with an average tariff of 4.4 percent, this levies a total tax of 23.8 percent on American goods and services.  

The foreign VAT was initially intended to help rebuild Europe after WW II by providing the continent with an advantage in trade. Today Europe is thriving – the European Union had a greater GDP than the United States in 2007. But instead of the VAT disappearing, it is expanding.  

Proponents of an American VAT say that the national sales tax would not only reduce the size of the nation’s deficit and put America on a more fiscally sustainable course, but it would also allow taxes at all levels to be lowered because of the increased revenues coming in.  

This is not the first time that the national VAT has gained appeal in the U.S.  As recently as last year, some very prominent Democrats were floating the idea.   

John Podesta, former White House chief of staff under Bill
Clinton and co-chairman of President Obama’s transition team, floated the idea of a national VAT, saying that raising taxes on the wealthy and cutting spending would not be enough to rein in the deficit.  

Separately, in an interview with PBS’s Charlie Rose, former Federal Reserve Chairman and member of President Obama’s Economic Recovery Advisory Board, Paul Volcker also suggested that an American VAT may indeed be necessary.

“My tax philosophy would be if we can’t deal with our expenditure loan with the present tax system, we’ve got to think about changing the tax system,” Volcker said. “When you think about changing the tax system, given the problem that we started out talking about, you’ve got to talk about some tax that hits consumption.”  

The most prominent voice calling for a national VAT may be House Speaker Nancy Pelosi, who, during an October appearance on PBS’s The Charlie Rose Show, suggested that the new tax could be used to pay for health care reform.
 
“Somewhere along the way, a value-added tax plays into this. Of course, we want to take down the health care cost, that’s one part of it,” Pelosi added. “But in the scheme of things, I think it’s fair to look at a value- added tax as well.”

Print PDF