Value Added

The value-added tax is the one method of collecting revenue that many conservatives actually love. A VAT taxes each step in the chain of production, calculating the increasing value of a commodity or service as it moves toward distribution. A sales tax, in contrast, is levied at the final retail stage only. Popular in Europe, the VAT is an encumbrance that conservatives would rather not have, of course, and they worry that it could be increased too easily. But at least it hits the right sorts of people: consumers. The conservative ideal is for taxes to be imposed on consumption rather than investment, and the VAT fits the bill. If taxes are necessary (and even the most conservative commentators agree that they are), they should at least provide an incentive for people to save and not to spend. The pool of capital thats accumulated as a result of that incentive is what the right wing believes helps the economy to grow. Conservatives also appreciate that a VAT acts economically very much like a flat tax, which is a longtime right-leaners favorite.

Liberals have traditionally been wary of the VAT for some of the same reasons that conservatives approve of it. The last thing a liberal wants is a tax that places a disproportionate burden on the people who are least able to pay it. And the VAT, like all taxes on consumption, is regressive at its core. Low-income people spend a much larger percentage of their earnings on consumer goods than rich people do. Liberals prefer the progressive income tax as a revenue source because the higher up the income scale people go, the higher tax rate they pay. From the vantage of the political left, a VAT is the wrong way to go.

Subscribe Online & Save 33%Or at least thats the way it used to be. Now, some liberals are beginning to embrace the VAT, and for plenty of good reasons. The main one is that government, which liberals favor, is increasingly struggling to make ends meet; federal programs desperately need a shot of new revenue to survive, and liberals will have to turn somewhere.

The federal revenue shortfall, already more than $200 billion a year, will reach even more mammoth proportions in the next decade or two. The biggest drivers of this problem are entitlement programs led by Social Security and Medicaretwo of liberals most precious policies. Those two alone will soon gobble up more than half of the federal governments annual budget, already at $2.7 trillion.

Another trillion-dollar problem is the alternative minimum tax. Because of a glitch written into the law 20 years ago, by 2015 more than 50 million Americans will be covered by the alternative system, which was supposed to be for millionaires only. Clearly, thats politically unsustainable. Such a development would be too obvious and too widespread a tax increase. And the final trillion-dollar blow is tax relief. Even a Democratic Congress will almost certainly want to extend some of the presidents tax cutsthose that benefit the middle class, such as lower individual tax rates, marriage penalty relief, and an increased childrens credit.

But each of these items will blow a hole in the federal budget. Where will the money to plug them come from? Raising income taxes? Raising the estate tax? Neither is likely because both are too virulently opposed by Republicans and moderate Democrats. Theres no way we could pay for government without some additional source of revenue. Were getting to the point where the income tax is being pushed as far as it can go, said Leonard E. Burman, a tax expert at the Urban Institute.

More and more people, including liberals, are pointing to a VAT as a better solution. One reason is the realization, among left-leaning economists, that a VATs regressivity can be reduced, if not completely offset, by exempting staples such as food and clothing. Another is the recognition that if a VAT is used to fund a major social program otherwise unavailable to the middle class and working class (such as universal health care) the overall effect will be progressive even if the tax itself is regressive.

Theres no reason that a VAT cant be a part of a progressive system, said William G. Gale, a tax scholar at the liberal-leaning Brookings Institution. The revenue has to come from somewhere and there arent that many options. Gale is not alone. Tax experts from other left-leaning bastions also believe that a VAT may be inevitable. A VAT is in our future, Burman concludes.

In addition, many top academic thinkers have been working for years to devise a new-yet-progressive tax system that includes a VAT. For instance, Michael J. Graetz, a Yale University Law School professor, has recommended that every married couple that earns up to $100,000 a year be exempted from the income taxa highly progressive notionand that couples above that level pay a simplified income tax. He would then impose a VAT of perhaps 14 percent to pay for a variety of thingsincluding, perhaps, improved health carethat would especially benefit the working class.

Not everyone accepts this formulation, of course. But such thinking has already begun to attract prominent Democrats. Former House Ways and Means committee member Rep. Thomas J. Downey is one of many Democrats who think Graetz is onto something. Downey wants his fellow party members to think more highly of a VAT. A grand deal is needed, he says. From a liberal perspective, a VAT could add a lot of value.

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