At least once a week, I get an email asking me about whether I think that President Obama will launch a national sales tax as part of tax reform efforts. My answer? Nope. I’ve said before that I think tax reform is an enormous undertaking and, let’s face it, with a struggling economy and health reform issues in the mix, the President has a bit much on his plate. Besides, it’s a significant election year – it would never get pushed through Congress.

Of course, that doesn’t mean they’re not thinking about it.

Rumors have been swirling fast and furious ever since Paul Volcker suggested that the administration take a second look at a value-added tax. And while the administration dismissed Volcker’s claims that raising taxes is necessary in order to get the deficit under control (as if we care about the deficit – it’s not like it’s real if we don’t see it, right?), it has been widely reported that President Obama’s economic team had calculated the impact of a 5% value-added tax.

Obama’s team says that they didn’t do it, with White House Press Secretary Robert Gibbs saying, “The president has not proposed this idea nor is it under consideration.”

As for those numbers? They are, according to the White House, “widely and publicly available” from other analysts. That part is true: last year, William Gale, a senior analyst at the Brookings Institute suggested that a VAT of 15-20% would eliminate the fiscal gap (downloads as a pdf). Since then, other fellows (including more at Brookings) have touted similar findings.

It’s worth noting that despite the tendency from the media – and even the White House – to use the phrases “national sales tax” and “value added tax” interchangeably, they are not the same thing. A national sales tax is a tax typically tacked onto the end of a sale of goods or services, much like state and local sales taxes are imposed now. A value-added tax is similar in that it’s a consumption tax but, unlike a sales tax, it’s collected at every stage along the production chain.

Think about it this way: when you buy something at the store, you pay one price for the item, plus applicable sales tax. You buy a pair of new Jimmy Choos, you pay sales tax to the retailer. The retailer submits the tax to the government. Voila, traditional sales tax.

But with a VAT, the leather to make those Jimmy Choos is taxed when sold to the manufacturer. The manufacturer puts the shoes together, marks up the price and sells them to the retailer; a tax is collected at the sale to the retailer but the manufacturer gets to deduct a credit for taxes paid for the leather. The retailer then sells the shoes to the buyer and collects tax at the sale; again, the retailer remits tax to the government less a credit paid to the manufacturer. In the end, the government receives tax from the sale of the leather, the manufacturer and the retailer. The total, however, is the same as if it had all been taxed at the retail level (because of the credits, right?) but it’s from three different sources.

Those who favor the VAT suggest that spreading the collection of tax out over a number of sources might reduce the potential for fraud – which means more taxes collected, less tax gap.

Opponents of the VAT claim that the taxes are ultimately passed along to the consumer which means that since the burden is carried by the consumers at the same rate, it’s regressive. The same rate of tax affects consumers with varying income levels in different ways: a 10% tax rate on necessities affects lower income taxpayers more dramatically than it does upper income taxpayers.

But does any of the discussion even matter? Despite the VAT making headlines as a means of deficit-reduction, it’s a non-starter for 2010. Last week, 85 Senators went on record as opposing the VAT with a non-binding vote introduced by Sen. John McCain (R-AZ): Expressing the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families on fixed income and only further push back America’s economic recovery and the Senate opposes a Value Added Tax. A similar measure in the House has been referred to the Ways and Means Committee.

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Author

Kelly Erb is a tax attorney, tax writer and podcaster.

9 Comments

  1. Where did the picture of the cash drawer till come from?

    I have never seen a till set like that. The singles are ALWAYS on the right as is the coins and the highest denominations on the left.

    Jeff Day

  2. Hi Jeff, It’s a stock photo from Picapp so I don’t know where the actual register is from.

  3. Personally I like the idea of a national sales tax replacing the income tax. I think it is more appropriate to tax spending rather than taxing earning. (Although I supposed economists might point out that the economy is helped by spending more than saving.)

    The problem I see with the idea of just adding on another tax to make up a deficit is that there are no indications that spending would remain in check. Unless you there is away to cap spending, just gathering more money from the country is a temporary fix at best.

  4. Nichole Parker Reply

    Just a couple of months ago a huge tax evasion scheme involving Fastweb and Telecom Sparkle was discovered here in Italy. What kind of tax was involved? VAT!

    If someone really wants to create a tax evasion scheme, they’ll find a way to do it no matter what kind of tax is involved.

  5. Jim Hayden EA Reply

    Kelly,

    No VAT now, but the discussion has started. As sure as night follows day, in 5 years we will have a VAT. There is no other viable way to raise the kind of revenue that the Government needs.

  6. I would gladly welcome a very low percent National Sales Tax if the money was used strickly to lower debt. And it should be temporary–for 5 years only. It is much better than threatening to take away medicare and social security for people who have worked their entire lives and paid into those programs. (I don’t care if they take Medicaid away.) So, people will have to lose a few cents buying something, but we who are looking at retirement are looking at losing thousands and thousands of dollars we paid over the years if those programs are raided.

  7. I don’t know why we complain about income taxes in the US. Has anyone checked how high the income tax is in Europe???? And they have a VAT on top of that! We have it good here! We just need to enforce the laws and have corporations and the very wealthy pay their share.

    We can implement a temporary VAT with no problem at all. Fears of sales going down are unfounded. DID WE STOP DRIVING WHEN THE PRICE OF GAS QUADRUPLED?? WHEN THE COST OF CARS TRIPLED? We love stuff. We love to buy stuff. That won’t change in the US, it’s in our DNA.

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