Should the United States Adopt the VAT To Deal With Federal Budget Deficits?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
February 27, 2023
“It is impossible to reduce long-term deficits with spending cuts alone…there’s just no way if you look at the numbers…. You have to raise money from someplace.” – Michael R. Bloomberg, former Mayor, City of New York (2011)
I served in the first term of Mayor Bloomberg’s administration, and have long regarded him as very savvy on financial and budgetary issues affecting the public and private sectors. In an ABC “This Week” interview with then anchor Christiane Amanpour, he was asked his opinion on recurring Federal budget deficits and the growing public debt in the last major debt ceiling crisis during the summer of 2011. He believed that expenditure cuts would be insufficient to deal with recurring budget deficits—a position also attributed to former President Obama during the 2011 debt crisis.
Currently, there is a great deal of interest and concern over the Federal government’s cumulative public debt, now nearly $31.6 trillion as of February 23, 2023 (refer to www.usdebtclock.org). As of January 19, 2023, the United States surpassed the statutory debt ceiling of $31.4 trillion.
The Treasury Department has begun utilizing extraordinary measures to avoid a default projected for later this summer. The White House and Congress have begun discussions to avoid default. There seems to be recognition by both the Executive branch and Congress that certain expenditure items as Social Security and Medicare would be “off the table.” Taken together with allocations for national defense, veterans benefits and interest payments on the national debt—they all account for approximately 80 percent of the Federal budget. Thus it would seem that to resolve recurring budget deficits, consideration will likely be needed to find significant revenue increases. Given the historic reluctance of elected officials to increase income tax rates and/or eliminate some tax deductions, particularly this close to an election cycle, I believe that another potential revenue increase would be a modest Federal Value Added Tax (VAT), which is the subject of this article.
The Value Added Tax (VAT), known in some countries as a goods and services tax (GST), can be defined as an incremental tax that is levied on the price of a product or service at each stage of production, distribution or sale to the end consumer.
The VAT is similar to, and often compared with, a national sales tax. It is considered an indirect tax because the person who ultimately bears the burden of the tax is not necessarily the same person as the one who pays the tax to governmental taxing authorities. It is considered a form of a consumption tax.
Germany and France were the first nations to adopt a VAT during World War I. Currently, more than 140 countries (as per KPMG) utilize a version of the VAT—including Argentina, China (PRC), Norway, Canada, UK, European Union, New Zealand and Egypt. In the United States, only the states of Michigan and Hawaii have used some version of it. When Richard Nixon became President in 1969, he considered proposing a VAT, with revenues to be shared with the states. During the 2020 Presidential campaign, Andrew Yang also proposed a VAT to pay for certain programs.
Here is how a VAT works: Let’s say there’s a wooden table I would like to buy, sold at retail with a 10 percent VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 or 10 percent in a tax. The furniture maker sells the table to the retailer for $120, sending $7 ($120-$50 = $70) and pays a 10 percent tax, or $7. Then the retailer sells the finished table to me for $150, sending $3 in taxes to the government (calculation: $ 150-$120 = $30 x 10 percent = $3). The total tax paid is $15, or 10 percent of the final retail price. In countries where the VAT is utilized, companies and businesses are required to register with tax authorities; and a flat tax rate system is utilized.
Many countries prefer the VAT as it avoids the cascading effect of a sales tax by taxing only the value added to a product at each stage of production (a VAT is also applied to services). It should be noted that the VAT is a destination-based tax. In some countries, such as the Philippines, senior citizens are exempt from paying a VAT; in others, exemptions are made for purchases of insurance, financial products, as well as medical and health care, training services, etc.
In the United States, the VAT is a controversial proposal. There are a number of arguments both for and against imposition of a Federal VAT, which are itemized in a 2017 Tax Foundation study:
Arguments in favor:
- A VAT tax is based on consumption, and thus provide a stable revenue base;
- It would be “neutral,” since it would be imposed on all types of businesses;
- A VAT would provide stronger incentives for companies to control costs and encourages consumers to save more;
- VAT would have the potential to generate large amounts of revenue at a low tax rate (such as 5 to 10 percent, and contribute to reducing annual Federal budget deficits;
- Would be relatively simple to administer;
- Under certain condition, VATs reduce obstacles to exports of commodities, which a sales tax does not do.
Arguments against:
- VATs represent a “hidden tax,”making it difficult to convince elected officials and consumers of its desirability;
- Might be harmful to new business start-up companies as well as struggling small businesses;
- A VAT may not be full-proof against fraud;
- Some consider a VAT an unfair practice, particularly against small-sized businesses.
- Some economists believe that a VAT would not have a positive impact on trade flows between the United States and other countries
Given current economic uncertainties in the United States, particularly inflation for certain goods and services, and disruption of the supply chain, now may not be the right time to implement a VAT. But it is certainly worth looking into. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served on many boards in Washington, DC and New York, and is a frequent commentator on public affairs and political issues affecting the nation and New York State. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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Should the United States Adopt the VAT To Deal With Federal Budget Deficits?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
February 27, 2023
“It is impossible to reduce long-term deficits with spending cuts alone…there’s just no way if you look at the numbers…. You have to raise money from someplace.” – Michael R. Bloomberg, former Mayor, City of New York (2011)
I served in the first term of Mayor Bloomberg’s administration, and have long regarded him as very savvy on financial and budgetary issues affecting the public and private sectors. In an ABC “This Week” interview with then anchor Christiane Amanpour, he was asked his opinion on recurring Federal budget deficits and the growing public debt in the last major debt ceiling crisis during the summer of 2011. He believed that expenditure cuts would be insufficient to deal with recurring budget deficits—a position also attributed to former President Obama during the 2011 debt crisis.
Currently, there is a great deal of interest and concern over the Federal government’s cumulative public debt, now nearly $31.6 trillion as of February 23, 2023 (refer to www.usdebtclock.org). As of January 19, 2023, the United States surpassed the statutory debt ceiling of $31.4 trillion.
The Treasury Department has begun utilizing extraordinary measures to avoid a default projected for later this summer. The White House and Congress have begun discussions to avoid default. There seems to be recognition by both the Executive branch and Congress that certain expenditure items as Social Security and Medicare would be “off the table.” Taken together with allocations for national defense, veterans benefits and interest payments on the national debt—they all account for approximately 80 percent of the Federal budget. Thus it would seem that to resolve recurring budget deficits, consideration will likely be needed to find significant revenue increases. Given the historic reluctance of elected officials to increase income tax rates and/or eliminate some tax deductions, particularly this close to an election cycle, I believe that another potential revenue increase would be a modest Federal Value Added Tax (VAT), which is the subject of this article.
The Value Added Tax (VAT), known in some countries as a goods and services tax (GST), can be defined as an incremental tax that is levied on the price of a product or service at each stage of production, distribution or sale to the end consumer.
The VAT is similar to, and often compared with, a national sales tax. It is considered an indirect tax because the person who ultimately bears the burden of the tax is not necessarily the same person as the one who pays the tax to governmental taxing authorities. It is considered a form of a consumption tax.
Germany and France were the first nations to adopt a VAT during World War I. Currently, more than 140 countries (as per KPMG) utilize a version of the VAT—including Argentina, China (PRC), Norway, Canada, UK, European Union, New Zealand and Egypt. In the United States, only the states of Michigan and Hawaii have used some version of it. When Richard Nixon became President in 1969, he considered proposing a VAT, with revenues to be shared with the states. During the 2020 Presidential campaign, Andrew Yang also proposed a VAT to pay for certain programs.
Here is how a VAT works: Let’s say there’s a wooden table I would like to buy, sold at retail with a 10 percent VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 or 10 percent in a tax. The furniture maker sells the table to the retailer for $120, sending $7 ($120-$50 = $70) and pays a 10 percent tax, or $7. Then the retailer sells the finished table to me for $150, sending $3 in taxes to the government (calculation: $ 150-$120 = $30 x 10 percent = $3). The total tax paid is $15, or 10 percent of the final retail price. In countries where the VAT is utilized, companies and businesses are required to register with tax authorities; and a flat tax rate system is utilized.
Many countries prefer the VAT as it avoids the cascading effect of a sales tax by taxing only the value added to a product at each stage of production (a VAT is also applied to services). It should be noted that the VAT is a destination-based tax. In some countries, such as the Philippines, senior citizens are exempt from paying a VAT; in others, exemptions are made for purchases of insurance, financial products, as well as medical and health care, training services, etc.
In the United States, the VAT is a controversial proposal. There are a number of arguments both for and against imposition of a Federal VAT, which are itemized in a 2017 Tax Foundation study:
Arguments in favor:
Arguments against:
Given current economic uncertainties in the United States, particularly inflation for certain goods and services, and disruption of the supply chain, now may not be the right time to implement a VAT. But it is certainly worth looking into. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has served on many boards in Washington, DC and New York, and is a frequent commentator on public affairs and political issues affecting the nation and New York State. You can reach him at: [email protected] or [email protected] or 914.441.3399 or 212.237.8000.
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