U.S. to Implement a VAT Taxing Scheme?

As reported by The New York Times, the topic of establishing a national consumption tax has been discussed by Congress often this year, especially in lieu of a trillion-dollar health coverage reform and an unprecedented federal budget deficit. To solve these long-term budget problems, the U.S. needs a new source of revenue, and the value-added tax ("VAT") is increasingly considered as a viable alternative. 

A national consumption tax or VAT is a tax on goods and services that is collected at every step of the production process, from importing and processing of raw materials, to the end consumer. In use in more than 130 countries worldwide, VAT is one of the world's most popular taxes and, among industrialized nations, ranges from 5% in Japan to 25% in Hungary. 

While introducing such a tax would require a reform of the entire federal tax code, economists attribute to VAT several significant advantages. Compared to a regular sales tax, VAT has a broader base as it is paid by almost everybody. VAT's broad reach is the reason why the International Monetary Fund (IMF) frequently recommends it to countries that need to raise money quickly. 

Furthermore, VAT is hard to escape: if at some point within the production chain a business evades paying the tax, the government will collect it from business at other stages of production. In a VAT system, since businesses usually get credit for taxes already paid by their suppliers, companies will pressure the non-paying business to pay their portion of VAT. In this regard, collecting VAT would be self-policing process. 

Earlier this year, the Washington Post reported that the federal budget deficit is projected to reach $1.3 trillion in 2010, which is the highest so far with the exception of this year's $1.8 trillion. On every dollar it spends, the Treasury Department borrows 46 cents of every dollar, primarily from China and other foreign creditors who are starting to get worried about the security of their investments. The national healthcare reform would only add to the budget deficit. 

Establishing VAT in the U.S. may be unlikely in the immediate future because of the still-tentative economic recovery and unwillingness of politicians to impose a new tax that would directly affect the revenues of their constituents; however, economists estimate that federal tax revenues need to rise by 20 to 30% in the next few years to cover its expenditures, and VAT may be selected as the least painful alternative.