Despite the fact that the report has yet to be issued and no one is certain of what it will include, Sen. Orrin Hatch (R-UT) last month launched a preemptive attack on President Obama’s tax reform panel’s recommendations, claiming that even broaching the subject of a value-added tax is “dangerous.”

The Economic Recovery Advisory Board’s subcommittee on tax reform was set to present a list of options to streamline America’s overly complicated tax system to the president last December but the report was delayed. Now the report is expected to be released in the coming weeks and there is speculation that a European-style VAT may be one of many options, which does not sit well with Hatch.

“I believe that the mere discussion of a VAT overlay on top of our current tax system is dangerous and could move some Washington policymakers further toward an inclination to increase spending by providing more revenue,” he said in a letter to the White House.

The Wall Street Journal editorial page has been sounding the alarm as well, despite having no evidence to support its claim.

“White House officials even talk privately about the galvanizing political benefit of a bond market crisis,” the paper wrote, “which would force panicked Members of Congress to accept a big new value-added tax. The President’s two looming tax reports … are intended to propose a VAT and other tax options.”

The panic is emanating from the fact the tax reform advisory board is being led by former Federal Reserve Chairman Paul Volcker, who has publicly expressed support for a VAT. The White House has said it is not considering the VAT as an option.

“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.”

A value-added tax would do just that. Taxes are levied at each stage of production, and included in the final price of a product or service. Therefore, it would hit consumers at the checkout counter, in effect putting a tax on consumption.

By taxing consumption, the VAT would encourage much-needed saving among the American people. The tax would raise enough revenues to drastically cut into the annual budget deficit and thus lessen the national debt over the long-run, all while exempting millions of Americans from federal income taxes.

According to the Tax Policy Center, a five percent VAT that covered 80 percent of goods could generate roughly $260 billion in 2012. 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.

Perhaps the most immediate impact a VAT would have on the American economy would be its immediate leveling of the international economic playing field.

Currently over 150 nations utilize a VAT. 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.

In 2007, American businesses faced a total economic disadvantage of $355 billion due to other nations’ VATs – $230 billion in other government’s rebates to their exporting businesses and $125 billion in border adjustment taxes imposed on U.S. importers. That massive disadvantage 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.

A VAT would provide domestic manufacturers with needed protection from mercantilist practices by foreign competitors, create needed manufacturing jobs, help balance the trade deficit and go a long way toward achieving the president’s goal of doubling American exports in the next five years. In fact, according to renowned economist Mark Zandi, a VAT may be the only way to reach that mark.

“If you wanted to achieve this, you would probably have to overhaul the U.S. tax system and have a value added tax as well as engineering a depreciation in the U.S. dollar,” he said, according to the Financial Times. “This would be a tall order.”

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