Report: VAT could generate $260 billion in 2012

A value-added tax set at 5 percent applied broadly to the U.S. economy in 2012 would generate nearly $260 billion, according to a new report by the Urban-Brookings Tax Policy Center.

White House adviser Paul Volcker said Tuesday that increased taxes, and possibly a value-added tax (VAT) that is used by European countries, may be needed to rein in deficits.

A VAT is similar to a sales tax but is applied to all levels of production, not just on the final purchase.

The Tax Policy Center paper, written by Eric Toder and Joseph Rosenberg and released Wednesday, found that a broad-based 5 percent VAT, one that included exemptions only for education, vehicle, consumer interest and government-financed health spending, would result in a $258.6 billion in 2012.

When exemptions were added for housing, groceries and private health spending, a 5 percent VAT would generate $161 billion in revenue in 2012.

The 2012 deficit projected by the Congressional Budget Office under President Barack Obama's economic policies would be $914 billion.

The report finds that revenue from a broad-based VAT could be enough to reduce the top corporate income tax rate from 35 percent to 7.4 percent, or the payroll tax from 6.2 percent to 0.3 percent.

Applying the VAT broadly would be regressive, hitting a higher proportion of income for middle-class taxpayers than that for the wealthy, the report said. Targeted exemptions or refundable credits could help make the VAT more progressive, the report found.

A VAT could also have effects on how taxpayers spend their money. It does less to discourage investing and saving than a high corporate income tax, Toder and Rosenberg wrote. The U.S. rate is among the highest for industrialized countries.