Value-added tax gains supportPublished 3:21pm Tuesday, October 19, 2010
Most of us are concerned about the ballooning national debt. If this problem is not addressed, we will not only pass on the burden of the debt to future generations but also encounter myriad financial challenges, both in this country and abroad.
An idea discussed for several years is beginning to receive serious consideration. This is the value-added tax (VAT), common throughout much of the industrialized world. About 150 nations have it.
The options for reducing the $13.5 trillion national debt are to reduce spending, increase taxes, or find additional sources of revenue.
It is difficult, if not impossible, to get Congress to reduce spending. And raising taxes is not appropriate in a recession.
About the only option left is a new revenue source. And this is where the VAT, a means of increasing revenue quickly, could come into play.
The VAT is a broad-based tax. It involves taxation of a product at every stage of production and distribution — when the raw material is sold, when the product is manufactured, when a store purchases it, and when the consumer buys it — with rates ranging from 5 percent in Japan to 25 percent in Sweden.
The VAT is simple to administer. At every stage, each firm deducts the taxes paid at the previous stage before it calculates its own VAT. The VAT is a highly efficient form of taxation because it is difficult to avoid since records are kept at each stage.
Unlike a sales tax, the VAT lacks visibility. It is hidden in the prices of products. But a 10 percent VAT still increases the costs of all products 10 percent. And it is easy to raise the rate, as Europeans have discovered.
The efficiency of the VAT in generating revenue quickly causes some people to oppose it. They label it a convenient excuse for increasing spending.
Nevertheless, we can expect a VAT proposal in the future.
Wayne Curtis, Ph.D., is on the board of directors of First United Security Bank. He may be contacted by email at email@example.com.