April 24, 2018
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Arguing the VAT Tax

Whatever you think of the VAT tax, it’s not going anywhere in the United States anytime soon. Paul Volcker, a senior adviser to President Barack Obama, says so, and he’s the one who said earlier that the VAT, or value-added tax, is “not as toxic an idea” as it once was.

First of all, what exactly is a VAT? It’s a sort of sales tax, but a levy on consumption rather than property or income, and with a different way of figuring it. A sales tax is paid directly by the purchaser at the point of sale and tacked onto the sale price. A VAT is paid at each point in the production and sale process.

Here’s a specific example from Wikipedia: Without any tax, a widget manufacturer that spends $1 on raw materials sells the widget wholesale for $1.20 to a retailer, who sells it to a consumer for $1.50 for a gross profit of 30 cents. With a 10 percent value-added tax, the raw materials producer sells the widget to a manufacturer for $1.10 and pays the government 10 cents. The manufacturer charges the retailer $1.32 ($1.20 + $1.20 x 10 percent) and pays the government 2 cents (12 cents minus the 10 cent tax added by the raw materials producer). The retailer charges the consumer $1.65 ($1.50 + $1.50 x 10 percent) and pays the government 3 cents (15 cents minus the 12 cent tax added by the manufacturer).

Complicated and lots of paperwork? Sure, but the same is true of the sales tax. VAT advocates argue that it is self-enforcing, since each step will see that the previous step has paid the tax, and that the consumer is not told of the tax and thus will be less likely to try to avoid it than in the case of a sales tax. Opponents note that it can hit the lower and middle class hardest.

When Mr. Volcker seemed to be pushing an American VAT tax, the Senate promptly denounced the tax in a nonbinding resolution by a vote of 85-13, with both Maine senators in the majority.

Last month, Mr. Volcker said the idea was too unpopular for consideration “now or in the indefinite future.” But he went on to say that a VAT “is common in every other industrialized country” and “it’s the kind of thing you have to look at.” President Obama and his Deficit Reduction Commission agree that everything is on the table for their report due in December.

A word of caution: Deficit hawks seem to be in the majority in the debt-reduction commission. In panic over the deficit caused mostly by war and the economic meltdown, they could rush toward the VAT or other unpopular taxes and slash rather than fix Social Security and Medicare, while neglecting the need for temporary deficit spending to restore the economy.

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