Can Washington Embrace The Value-Added Tax?

The U.S. is expected to rack up at least $10 trillion in debt in the next decade — and that's put three letters into the political conversation: V-A-T, or value-added tax. It would be a revenue-generating cash cow, which Democrats prize, and it would be a flat tax, which Republicans yearn for. Many other countries have one.

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Over the next 10 years, the federal government is expected to spend $10 trillion more than it takes in from taxes. And many economists worry about a potentially bigger crisis in spending and deficits down the road as baby boomers continue to turn 65 and Medicare benefits kick in.

Now Congress will eventually have two main options, either severely curtail spending or find new ways to raise money. So that's probably why there's talk about doing the once unthinkable: Introducing a nationwide consumption tax, better known as VAT. Now, most industrialized countries have one. And here in the U.S., it could raise hundreds of billions of dollars in federal revenues.

In a few minutes, we'll pop into Ace Hardware for a look at exactly how a VAT would affect the prices on ordinary items.

But first, NPR's Mara Liasson reports on how the VAT became an acceptable topic of conversation here in Washington.

MARA LIASSON: President Obama made news this week when he was asked about the possibility of a VAT and did not rule it out. In an interview on CNBC, the president acknowledged that a consumption tax is used in almost every other industrialized country.

President BARACK OBAMA: It's something that would be novel for the United States. And before, you know, I start saying this makes sense or that makes sense, I want to get a better picture of what our options are.

LIASSON: That followed remarks made earlier this month by Paul Volcker, White House adviser and former Federal Reserve Board chairman. Volcker said that that might be necessary and that it wasn't as toxic an idea as it used to be. On that last notion, Volcker may be wrong.

Earlier this month, the Senate voted 85 to 13 for a non-binding resolution condemning a value-added tax. Up until this week, the White House, too, had treated the idea like political kryptonite and White House spokesman still insists that that is not under consideration. And there are plenty of other Democrats who don't like it either.

One is Senator Ron Wyden who has his own ideas about simplifying the income tax system without adding a VAT.

Senator RON WYDEN (Democrat, Oregon): Apart from the fact that the folks in my state, Oregon, have voted against a sales tax about 8,920 times, you don't see a lot of people showing up at their senator's office carrying signs saying please raise taxes.

Dr. ERIC TODER (Fellow, Urban Institute): Plain and simple, it's a tax increase. It's a broad-based tax increase that affects middle-income people.

LIASSON: That's former Treasury official Eric Toder. He says both parties have problems with the VAT.

Dr. TODER: The Republicans have said taxes don't get raised, period. That's their mantra. Obama has said taxes only get raised on very rich people, not on the middle class.

LIASSON: But there's also something for both sides to like about a VAT. It's a flat tax, everyone pays the same rate. Conservatives like that. But as a flat rate, it weighs more heavily on those with less money and liberals don't like that.

Still, it's a cash machine in a time of deep deficits. And while that has appealed to Democrats, it scares Republican Congressman Paul Ryan of Wisconsin.

Representative PAUL RYAN (Republican, Wisconsin): The problem with the consumption tax is it's a simple revenue raiser that can be easy for politicians to raise later on. I think it will be a big mistake for Congress to impose a consumption-based tax reform before tackling the biggest problem, which is the spending problem we have here in Washington.

LIASSON: Republicans shrink from the VAT talk now, but the idea have conservative roots. The fair tax, a national sales tax, was proposed by conservatives long ago as a replacement for the income tax. And Ryan himself includes a version in his own fiscal road map, substituting a VAT for the corporate income tax.

That's why some can imagine a grand bargain, combining a VAT with lower taxes for Medicare and Social Security. That would make it more progressive. Again, Eric Toder.

Dr. TODER: Increasing the personal income tax very much is not a very good idea, and so that you're left with a VAT which could be used partly to buy down income tax rates, partly to buy down corporate rates and partly to buy down the deficit. But that's not to say the political system is ready for that.

LIASSON: And few believe it is, at least right now. Again, Republican Congressman Paul Ryan.

Rep. RYAN: When we did this Bush tax cuts in 2001, the left sort of accused conservatives of, quote-unquote, "starving the beast" of cutting taxes so that government could only grow so much. And I think there's a little truth to that allegation, which is we believe we should limit the revenue take to government so you can basically limit the size of government.

Well, I think the reverse is happening right now. I think what's going to Washington is stuff-the-beast mentality, where they're stuffing the spending, the borrowing so much with such incredible deficits that the only course out of this is a new tax system on top, and that's where that talk of the VAT comes in.

LIASSON: So, any potential agreement on a value-added tax still awaits an agreement on the size of government itself. Republicans, Democrats and the public will have to decide how much government they can live without before they resolve how to pay for the rest.

Mara Liasson, NPR News, Washington.

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