VAT: An Alternative To Raising Income Tax

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How would a value-added tax work in the real world? Host Guy Raz visits a Washington, D.C., hardware store with Bob Carroll to find out. Carroll is a tax expert at American University.

GUY RAZ, host:

So what would a value-added tax actually mean for consumers? Well, Bob Carroll, a tax expert at the American University is with me now. And we're both inside an Ace Hardware store here in downtown Washington, D.C.

Bob, thanks for joining me.

Mr. BOB CARROLL (Tax Expert, American University): Oh, my pleasure.

RAZ: Okay. So in my hand I have a hammer. It costs $9.99 and with - so with D.C. sales tax, this would run about $10.60.

Mr. CARROLL: Exactly.

RAZ: How much could it go with the value-added tax?

Mr. CARROLL: Well, it depends on the size of the value-added tax, of course. But just to keep the math easy and if we just ignore the D.C. sales tax, if you had a 10 percent value-added tax, from the consumer's point of view, it would operate pretty similar to a sales tax.

RAZ: It would be another dollar?

Mr. CARROLL: It'd be another dollar, the 10 percent.

RAZ: $11.

Mr. CARROLL: So the cost of the hammer rather than being $10 would be $11.

RAZ: Now I reported from overseas for several years. And in most countries, I noticed that the price advertised was the price you paid at the register. If it was 5 euros, the price is 5 euros. The tax was already included in the prices for consumers.

Mr. CARROLL: Yeah.

RAZ: Is that how it might work here or...

Mr. CARROLL: It might. You know, it's kind of an option. If you wanted greater transparency, one could require the value-added tax to be listed on the price on the label that consumers see as well as the cash register.

RAZ: I'm not asking you to take a position on it, one way or the other, because you're a tax analyst. But do you think that this is something that could happen within the next five or even 10 years?

Mr. CARROLL: I think it's really tough to say. I think the timing is what's really difficult. I think it's inevitable that we're going to have to find additional revenue to help deal with the looming entitlement problem where the size of the federal government will rise to over 40 percent of GDP if we do nothing, and we only raise 17 or 18 percent of GDP today.

RAZ: We're going to have to find ways to raise more money.

Mr. CARROLL: So - yeah.

RAZ: We're going to have to find more ways.

Mr. CARROLL: But the trick is you can't solve the entitlement problem by simply just raising revenues. You have to control spending.

RAZ: That's Bob Carroll. He's a tax expert at American University. And he joined me here at the Ace Hardware in downtown Washington, D.C. Bob Carroll, thank you so much for joining me.

Mr. CARROLL: My pleasure, Guy.

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