- Days left
Is there a value-added tax, or VAT, in our near future? According to a story by Shawn Tully in Fortune, this new tax scheme is not only possible, but perhaps inevitable, given the danger to the U.S. economy posed by our enormous and growing national debt.

The article cites a recent sobering report from the Congressional Budget Office about the ramifications of our growing national debt. In comparison to our gross national product, our current deficit is the highest since WW II. The CBO did one projection assuming that the Bush tax cuts were extended, the alternative minimum tax was indexed to inflation, and income tax revenue yielded 19% of GDP. The results? By 2020, our debt would equal 90% of our GDP; by 2035, 180%.



The report goes on to warn that the tipping point of a catastrophe, that day that our creditors lose confidence in the U.S. and start demanding better interest rates from us, isn't predictable. But the potential is real, the consequences dire.

The solution? The hard choice is between cutting spending and raising taxes (or both). Tully interviewed Republican Congressman Paul Ryan, who states that he believes the VAT is "far more likely than most Americans imagine."

So what is a value-added tax? A VAT is a tax levied on an item at each step of its production. For a harmonica, the ore sellers, the metal makers, the component crafters, the assemblers, the wholesellers and the retailers would all pay a tax at the time they sold their materials to the next company up the production chain. Today, taxes are only collected from the company that retails the product to the end user; in this case, a blues musician.

The average VAT rate among countries that already employ it? Eight-teen percent. According to one expert cited by Tully, a 25% VAT could balance our budget, pay for health care, and reduce income taxes. Of course, everything you buy would be 25% more expensive.

So why impose a VAT instead of increasing sales taxes? Sales taxes in the U.S. are collected by the states and their municipalities; a value-added tax would be national. Therefore, don't expect sales taxes to go away if value-added taxes are imposed. The result? An increased price on all products covered under the VAT.

Another reason that we might see VAT is that it would be a way to tap into revenue from tax-free Internet sales, by taxing the products during each step of production and collecting the VAT nationally.

The most important reason to impose a VAT, however, might be to boost the confidence of outside investors that the U.S. recognizes and is dealing with its debt problem. We can't afford international doubt about our ability to pay our bills; that way lies disaster.

On the other hand, many critics note that the financial burden of a VAT is unfairly regressive. That's because, on a percentage basis, it has a bigger impact on the poor and smaller impact on the rich. Low income households have to spend more of their income on essential goods and services. But as household income grows, more spending becomes optional, or discretionary. A big VAT could lead households with higher incomes to simply spend less on discretionary goods and services, thus slowing the economy.

Increase your money and finance knowledge from home

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

TurboTax Articles

What is IRS Form 8824: Like-Kind Exchange

Ordinarily, when you sell something for more than what you paid to get it, you have a capital gain; when you sell it for less than what you paid, you have a capital loss. Both can affect your taxes. But if you immediately buy a similar property to replace the one you sold, the tax code calls that a "like-kind exchange," and it lets you delay some or all of the tax effects. The Internal Revenue Service (IRS) uses Form 8824 for like-kind exchanges.

What are ABLE Accounts? Tax Benefits Explained

Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529.

What is IRS Form 8829: Expenses for Business Use of Your Home

One of the many benefits of working at home is that you can deduct legitimate expenses from your taxes. The downside is that since home office tax deductions are so easily abused, the Internal Revenue Service (IRS) tends to scrutinize them more closely than other parts of your tax return. However, if you are able to substantiate your home office deductions, you shouldn't be afraid to claim them. IRS Form 8829 helps you determine what you can and cannot claim.

What is IRS Form 8859: Carryforward of D.C. First-Time Homebuyer Credit

Form 8859 is a tax form that will never be used by the majority of taxpayers. However, if you live in the District of Columbia (D.C.), it could be the key to saving thousands of dollars on your taxes. While many first-time home purchasers in D.C. are entitled to a federal tax credit, Form 8859 calculates the amount of carry-forward credit you can use in future years, not the amount of your initial tax credit.

What is IRS Form 8379: Injured Spouse Allocation

The Internal Revenue Service (IRS) has the power to seize income tax refunds when a taxpayer owes certain debts, such as unpaid taxes or overdue child support. Sometimes, a married couple's joint tax refund will be seized because of a debt for which only one spouse is responsible. When that happens, the other spouse is said to be "injured" and can file Form 8379 to get at least some of the refund.

Add a Comment

*0 / 3000 Character Maximum