In his “E.J.’s Precinct” blog at WaPo, E.J. Dionne is hosting an interesting discussion about the national sales tax, a.k.a. value added tax, as a not-so-new idea generating fresh interest among Democrats. Dionne’s blog riffs on a WaPo article by Lori Montgomery in Wednesday’s edition entitled “Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look.”
Broadly defined the VAT is a regressive tax, and rightly opposed by most progressives. Still the advantages are impressive and acceptable to most other social democracies, as Montgomery explains:
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 rate.
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.
And pressure seems to be mounting to at least open a discussion about some form of the VAT. Montgomery quotes Democratic Senator Kent Conrad “I think a VAT and a high-end income tax have got to be on the table.” And even in its most regressive form, taxing nearly everything that is sold, using the revenues to finance universal health care for example, might make it more palatable to progressives. According to one estimate cited by Montgomery, “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.”
Dionne, who has opposed the VAT as regressive in the past, now says “I am starting to think such a tax may be inevitable because government is going to need a lot of revenue in the coming years.” One of the more interesting comments responding to Dionne’s blog comes from Tomscanlon1, who notes that a VAT can be modified to make it less regressive:
Canada was in a deep hole in the early 90s and bit the bullet on a very unpopular national sales tax of 7%. It saved them and today it’s down to 5%. It exempts basic necessities like food, rent and kid’s clothes, so it doesn’t punish the poor. Canada’s finances look a hell of a lot healthier than those of the US.
Certainly, alcohol, tobacco, fatty and sugar-heavy foods and sodas that cause so many health problems should be taxed more rigorously for health reasons as well as for enhancing federal revenues. Healthy food should be exempt. Jennythacker adds in Dionne’s blog:
The fed could follow California’s example and choose not to tax necessities. Food items bought in stores would not be taxed although restaurants might be. Entertainment items like theater tickets, ball games, etc. would be. Home utilities (heating oil, water, garbage pick up, recycling, electricity) might be considered basic necessities and therefore not taxed.
Or the fed could follow Virginia’s example and tax only luxury goods (cars, boats, RV’s etc. costing more than $20,000)…We can also keep the tax small. Few people will be severely hurt by a 1% tax, but the benefits to our federal budget would be enormous…There are ways to make the tax happen. There are ways to make it effective. And there are ways to do it that don’t necessarily hurt the poor more than the well-t-do. It is possible, and it might be a very good idea.
It may be that American voters will be more receptive to a national sales tax in the current economic crisis. As another commenter, Spencer99, adds,
…If we are going to promise European benefits, we need European taxes. Europeans vote for government benefits knowing they will actually be paying for the benefits. the VAT system is much closer to this
A commenter named Garak makes this point about a national sales tax being a tough sell, politically:
Any national VAT or sales tax will pressure states to cut their sales taxes. The higher the total sales tax, the more resistance from the public. It’s easier to pressure state and local governments to cut taxes than it is to pressure the federal gov’t.
Further, states will resist because first, sales taxes historically are reserved to the states, and second, because states rely on them to a very high degree. You will see states fighting a national VAT/sales tax tooth and nail…Europe doesn’t have this problem because taxes are primarily national taxes, not provincial.
Clearly there are lots of problems associated with federal sales tax proposals. But it’s not like income tax hikes are a cakewalk for the Administration. As the contributors to the discussion at E.J.’s Precinct have demostrated there are a range of modifications that can make the VAT an easier sell to American voters. Maybe now would be a good time for the Democratic Party to hold public hearings across the country to generate further discussion about creative ways to make a national sales tax a progressive alternative.