VAT Debate Resurfaces In US

bu Mike Godfrey, Tax-News.com, Washington

16 October 2009

The Center for Freedom and Prosperity Foundation (CF&PF) has warned that imposing a federal value-added tax (VAT) in the United States would lead to more spending, bigger government and a higher tax burden, following comments from senior Democrats and Obama administration advisors that such a tax would be desirable.

Given the rising federal deficit, set to hit USD1.8 trillion this year, the hefty price tag of the imminent health care reforms and the fact that President Obama's tax reform panel is due to report its recommendations by the end of this year, it is perhaps not surprising that this debate is happening again; a similar debate about consumption taxes was had around the time President Bush created his own tax panel in 2004. However, this time, it seems that opinion is crystallizing in favor of the tax in the places of power rather than in lecture halls and committee rooms.

Talking on the subject of tax reform on PBS's Charlie Rose show recently, House Speaker Nancy Pelosi, a California Democrat, said that "somewhere along the way, a value-added tax plays into this," before going on to add: "Of course, we want to take down the health-care cost, that's one part of it. But in the scheme of things, I think it's fair to look at a value-added tax as well." John Podesta, an Obama advisor, has also suggested that VAT is worth looking at, in a "small and progressive" way.

However, according to the CF&PF, the evidence from Europe, where most countries impose VAT at rates averaging about 20%, the evidence that such taxes achieve their goals is far from convincing.

"VATs are a money machine for more government spending," said CF&PF President Andrew Quinlan. "The crippling expansion of government in Europe over the last several decades was made possible by the VAT," he added.

In a video released by the CF&PF on October 14, the Cato Institute's Dan Mitchell, who also serves as Chairman of the CF&PF's Board, argued that VATs have historically led to a greater overall tax burden and "massive" increases in government spending.

"Giving politicians this additional source of revenue would be like giving an alcoholic keys to a liquor store," Mitchell quipped. "The income tax system we have today is a nightmarish combination of class warfare and corrupt loopholes, but adding a VAT does not solve any of those problems," he argued.

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