Calls for new VAT tax prove unpopular with both Dems, GOP

A range of economists have come to Capitol Hill to sing the praises of a value-added tax (VAT), but their song is falling on deaf ears. 

While some elected officials have pledged to keep an open mind about the VAT, many lawmakers from both parties remain far from convinced, with concerns ranging from how regressive VATs can be to the prevalence of consumption taxes elsewhere in the world.

ADVERTISEMENT
“It’s the worst of all worlds,” said Rep. Tom Price (R-Ga.), a member of the House Ways and Means Committee. “The American people don’t want to be Western Europe.”

That hasn’t stopped economists, including some who once worked for Republican administrations, from arguing in favor of the VAT’s merits. 

At a string of congressional hearings and think-tank events over the last month or so, economists with experience at the highest levels of government — including in Republican White Houses — have showered kind words on the VAT. The tax’s efficiency, they have said, comes because it does not particularly penalize savings and makes what is subject to taxation less of an opinion, among other reasons.

“If you take everyone’s projections of where we’re going in the future, it looks like we’re on a trajectory where we’re going to need more revenue,” said Donald Marron, who worked in the George W. Bush White House and is now director of the Urban-Brookings Tax Policy Center. “And then you have to have a discussion on where that comes from.”

The concept of a value-added tax — which, generally speaking, refers to a system where a levy is added at each stage of manufacturing and distribution — popped up last year, when it was floated by Paul Volcker, an economic adviser to President Obama. 

But even the idea of the VAT was quickly shot down on Capitol Hill at that time, as 85 senators voted for a resolution deriding the VAT as a “massive tax increase” that would impede economic recovery.

Economists who favor introducing the VAT as part of a reform of the tax code realize it would have an uphill climb in Congress, though they continue to stress that consumption taxes are a much more resourceful way to collect revenue than taxing areas like income. 

Some also note that policymakers are currently pushing to rein in only some discretionary spending, which is a relatively small part of the federal budget. Meanwhile, more long-term problems like healthcare entitlements have been shunted to the side, at least for now. 

The VAT isn’t on the mind of most, if any, Republicans in the Senate and House, who have generally said that the government’s problem is spending, not revenue collection. Some in the GOP camp have also dubbed the VAT a “money machine” that would lead to a bigger government. 

And while all but one of the 13 senators who voted against last year’s VAT resolution were Democrats, lawmakers from that party also worry about how lower- and middle-class families would adapt to the tax, which can lead to higher prices on an array of pocketbook items. 

“It’s always nice in the theoretical. It’s just not nice in its practical application,” said Rep. Richard Neal (D-Mass.), the ranking member of the House Ways and Means subcommittee on Select Revenue Measures. “As much as we complain about $3.50 for a gallon of gasoline, I think there’d be a louder round of complaints at $6 a gallon.”

On the Senate side, both the chairman, Sen. Max Baucus (D-Mont.), and ranking member, Sen. Orrin Hatch (R-Utah), of the Finance Committee have pledged to take a look at a wide range of options as Washington officials examine ways to overhaul the nation’s tax code. 

But both senators have expressed skepticism about the VAT before, and aides said they saw no reason to believe either had rethought his position. 

Sen. Ben Cardin (D-Md.), also a Finance Committee member and one of the few senators who voted against last year’s Senate resolution, said he believed the VAT should be part of the tax reform discussion, with the caveat that any consumption tax would need to be implemented in a way that kept the tax code at least as progressive as it is now.

“Particularly in the current climate, it’s one of the more pragmatic ways to accomplish what everybody wants to accomplish in balancing the budget and maintaining integrity in our tax code,” Cardin said. “I think it has some political legs.”

Comments like that have led groups like Americans for Tax Reform — which has an anti-VAT caucus of roughly 70 members, most of them Republican — to say the VAT is a top priority for Democrats. 

“Listen, VAT is the endgame for the Democrats,” said Grover Norquist, the group’s president, adding that Democrats would have to control the House, Senate and the presidency to pull that off. 

But some economists caution that the issue doesn’t need to be looked at in quite such partisan terms.

“If we keep going like this, once the American people realize they’re going to have to pay higher taxes one way or another, I think they’ll be more open to it,” said Benjamin Harris, of the Brookings Institution.