|Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look
Levy Viewed as Way to Reduce Deficits, Fund Health Reform
By Lori Montgomery
Washington Post Staff Writer
WITH BUDGET DEFICITS soaring and President Obama pushing a
trillion-dollar-plus expansion of health coverage, some Washington
policymakers are taking a fresh look at a money-making idea long considered
politically taboo: a national sales tax.
Common around the world, including in Europe, such a tax -- called a
value-added tax, or VAT -- has not been seriously considered in the United
States. But advocates say few other options can generate the kind of money
the nation will need to avert fiscal calamity.
At a White House conference earlier this year on the government's budget
problems, a roomful of tax experts pleaded with Treasury Secretary Timothy
F. Geithner to consider a VAT. A recent flurry of books and papers on the
subject is attracting genuine, if furtive, interest in Congress. And last
month, after wrestling with the White House over the massive deficits
projected under Obama's policies, the chairman of the Senate Budget
Committee declared that a VAT should be part of the debate.
"There is a growing awareness of the need for fundamental tax reform," Sen.
Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end
income tax have got to be on the table."
A VAT is a tax on the transfer of goods and services that ultimately is
borne by the consumer. Highly visible, it would increase the cost of just
about everything, from a carton of eggs to a visit with a lawyer. It is also
hugely regressive, falling heavily on the poor. But VAT advocates say those
negatives could be offset by using the proceeds to pay for health care for
every American -- a tangible benefit that would be highly valuable to
Liberals dispute that notion. "You could pay for it regressively and have
people at the bottom come out better off -- maybe. Or you could pay for it
progressively and they'd come out a lot better off," said Bob McIntyre,
director of the nonprofit Citizens for Tax Justice, which has a health
financing plan that targets corporations and the rich.
A White House official said a VAT is "unlikely to be in the mix" as a means
to pay for health-care reform. "While we do not want to rule any credible
idea in or out as we discuss the way forward with Congress, the VAT tax, in
particular, is popular with academics but highly controversial with
policymakers," said Kenneth Baer, a spokesman for White House Budget
Director Peter Orszag.
Still, Orszag has hired a prominent VAT advocate to advise him on health
care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel
and author of the 2008 book "Health Care, Guaranteed." Meanwhile, former
Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama
assigned to study the tax system, has expressed at least tentative support
for a VAT.
"Everybody who understands our long-term budget problems understands we're
going to need a new source of revenue, and a VAT is an obvious candidate,"
said Leonard Burman, co-director of the Tax Policy Center, a joint project
of the Urban Institute and the Brookings Institution, who testified on
Capitol Hill this month about his own VAT plan. "It's common to the rest of
the world, and we don't have it."
Seeking New Revenue
The surge of interest in a VAT is testament to the extraordinary depth of
the nation's money troubles. While some conservatives have long argued that
a consumption tax would provide a simpler and more efficient alternative to
the byzantine U.S. income tax code, this time it's all about the money.
The federal budget deficit is projected to approach $1.3 trillion next year,
the highest ever except for this year, when the deficit is forecast to
exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it
spends, largely from China and other foreign creditors, who are growing
increasingly uneasy about the security of their investments. Unless Congress
comes up with some serious cash, expanding the nation's health-care system
will only add to the problem.
Obama wants to raise income taxes for high earners and impose new levies on
business, but those moves would not generate enough cash to cover the cost
of health care, much less balance the budget, and they have not been fully
embraced by Congress. Obama's plan to tax greenhouse-gas emissions could
raise trillions of dollars, but again, Congress is balking.
Key lawmakers are considering other ways to pay for health reform, including
new taxes on sugary soda, alcohol and employer-provided health insurance.
The last proposal could raise a lot of money -- nearly $1 trillion over the
next five years, according to White House budget documents. But options on
the table would raise a fraction of that sum. And while it might pay for
health care, it would barely dent deficits projected to total nearly $4
trillion over the next five years and to grow rapidly in the future, as baby
boomers draw on Social Security and Medicare.
Enter the VAT, one of the world's most popular taxes, in use in more than
130 countries. Among industrialized nations, rates range from 5 percent in
Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT
has permitted Ireland to attract investment by lowering its corporate tax
The VAT has advantages: Because producers, wholesalers and retailers are
each required to record their transactions and pay a portion of the VAT, the
tax is hard to dodge. It punishes spending rather than savings, which the
administration hopes to encourage. And the threat of a VAT could pull the
country out of recession, some economists argue, by hurrying consumers to
the mall before the tax hits.
A VAT's Bottom Line
What would it cost? Emanuel argues in his book that a 10 percent VAT would
pay for every American not entitled to Medicare or Medicaid to enroll in a
health plan with no deductibles and minimal copayments. In his 2008 book,
"100 Million Unnecessary Returns," Yale law professor Michael J. Graetz
estimates that a VAT of 10 to 14 percent would raise enough money to exempt
families earning less than $100,000 -- about 90 percent of households --
from the income tax and would lower rates for everyone else.
And in a paper published last month in the Virginia Tax Review, Burman
suggests that a 25 percent VAT could do it all: Pay for health-care reform,
balance the federal budget and exempt millions of families from the income
tax while slashing the top rate to 25 percent. A gallon of milk would jump
from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost
$6,250, but the nation's debt would stabilize and everybody could see a
Sales Tax Gains Momentum
Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal
the alternative minimum tax, said he's received a number of phone calls from
lawmakers interested in his idea, though "they can't quite imagine how to
make it happen politically." Burman said the 25 percent rate has caused some
sticker shock, and he's trying to figure out how to bring it down.
Graetz's proposal drew an endorsement from Volcker, who last year called it
"a sensible plan for reform." (Volcker did not respond to a request for
comment.) It also has piqued the interest of Conrad, the Senate Budget
Committee chairman who argues that it could be modified to accommodate
Obama's pledge not to raise taxes on families who make less than $200,000 a
"I think interest is quietly picking up," Graetz said. "People are beginning
to recognize that the mathematics of the current system are just
unsustainable. You have to do something. And a VAT has got to be on the
table if you want to do something big and serious."
Still, the Senate Finance Committee declined to include a VAT among the
options it is considering to pay for health reform. And even VAT supporters
doubt the tax will find a place among the tax-reform proposals the Volcker
panel has been asked to produce by Dec. 4.
Though the nation's fiscal outlook is grim, Burman said "the situation will
have to get more desperate" before lawmakers are likely to consider a new
levy aimed directly at the pocketbooks of every one of their constituents.
Most lawmakers are still looking for "a painless source of revenue" to
overhaul the health-care system and dig the nation out of debt, Burman said.
"Who knows?" he added. "Maybe the tooth fairy will bring that to them."