Uncle Sam has a tax problem — and he’s looking at one European idea to help solve it.
No doubt, “it” is a big problem. The current national public debt is about $12.8 trillion, or about $41,760 to each of the nation’s 308 million citizens. The U.S. Congressional Budget Office pegs that debt to grow to about $20 trillion by 2020.
Paying that debt down likely means more taxes, and one new tax idea that is gaining momentum in Washington, D.C., is the value-added tax, more commonly known as the VAT.
Nothing is set in stone yet, but the White House is giving the value-added tax some serious thought. More formally, the CBO right now is looking into the feasibility of such a tax, and what it might mean to government revenues, businesses and, of course, U.S. taxpayers.
So what is the value-added tax, and what would it mean to American taxpayers?
The tax, created by a French economist back in 1954, is essentially a sales tax on steroids. Unlike the Fair Tax, which is imposed only at the point of transaction, the value-added tax is a sales tax imposed throughout every layer of production that leads to a consumer transaction.
That process starts at the raw materials provider, goes to the product manufacturer, goes through the retailer and winds up in the customer’s hands. Think of a new car transaction: The steel producer sells to the auto manufacturer, who sends a new car off the production line to an auto dealer, where it winds up on the showroom floor. Ultimately, a consumer buys the new car. Each transaction in the chain is assigned a "value added" by the government, and is taxed accordingly.
VAT levels vary from country to country, but the value-added tax in France stands at 20% right now, and in Germany, it’s 19%.
The whispering in Washington points to a significantly lower value-added tax of about 5%-7% as a starting point. According to the CBO, if the U.S government charged a 7% VAT on every consumer transaction then it could raise about $1 trillion in revenue. But another study — this one by the Washington-based Tax Policy Center, says that a 5% VAT would bring in about $260 billion if implemented by 2012. Already, there are doubts among economists that food and clothing would be included in a value-added tax. If that’s the case, then the government would need the value-added tax to go higher than 5%-7%, no matter whose numbers you believe.