What is a VAT? The Value Added Tax or VAT is a tax on consumption, similar to that of a sales tax, however the VAT is collected at the different stages of production instead of by the retailer alone
Now I want to put my comments into context, I don't agree with all elements of the Fair tax or the VAT for that matter, but I think there are attrbutes and ideas in both that could help our country's fiscal situation, provide growth for small businesses & jobs, modify behavior so that individuals & families have incentives to save, and give our companies a more level playing field in the increasingly competitive global environment.
I know, the VAT is highly regressive, however there are ways to make it less so, by taking some of the ideas from the FAIR tax crowd, specifically prebates. A prebate is just what is sounds like a tax rebate/refund, given to working families that meet some income level threshold. However, instead of receiving a refund after filling out a tax form, the tax filer, business owner, or employer would report their income to a very slimmed down version of the IRS at the beginningof the year. At some point afterward, the Treasury would issue a check for an appropriate sum based on age and income...here is a calculator used by the Fairtax.org people which seems plausible.
However, none of this matters as long as the income tax is still being collected. I would propose that a hybrid VAT with elements of the Fair tax and traditional VAT be phased in and the income tax be simultaneously phased out, along with all of the perks, loopholes, and down right stealing that the current tax code contains. The current tax code is a sham and is geared heavily towards the rich and well connected.
Implementation of a hybrid VAT, as explained above, and the phasing out of the income tax along with the elimination of taxes on all small businesses making less than $1 million would be a game changer. Especially if the government starts direct lending to small businesses with super low rates and significantly flattens and lowers the rate on medium and large businesses.
Republicans however are convinced that the President will propose a VATand can't wait to label him a tax and spend Liberal, Ross Douthat, New York Times has this
Charles Krauthammer has this
And Clen Hubbard WSJ has this
Conservative columnist James Pethokouskis writing for Reuters says it would be a tough sell but it may be inevitable, so here are four steps that need to be done before it could pass:
Yet there is a reasonable scenario where America would accept a VAT. In fact, it is the only scenario under which we should accept a VAT.
First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)
Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can’t be an add on.
Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.
Fourth, the intended tax burden should be kept level at first. A pro-growth VAT — one that does away with corporate and investment taxes — might produce more revenue merely by expanding the economic pie.
I can live with all those, however the first may be a distraction to getting real legislation and change. You see I agree with the populist anger out there that our fiscal house is burning and we need tax reform. The special interest and lobbyists in Washington have our Representatives under a spell, the spell of Money!
Only by doing away with all the loopholes, special deals, and thousands of pages of loopholes will we even begin to solve our issues.
Unfortunately, only another crisis, similar to that of financial meltdown I'm afraid will be needed as a catalyst for change. Maybe a premature credit rating downgrade of US debt will do it?
I don't know but I do know that massive spending cuts like Rep Ryan has proposed are unimaginable and improbable. Raising taxes alone is not politically feasible either, so only a combination of both will get us to where we need to be....although as with everything in Washington it seems, it will be messy once the lobbyists get a hold of it.
Updated: Please, those who disagree with the diary don't use the elimination of SS or Medicare as your argument, that will NEVER happen and you know it. However, there will have to be some reforms and updates to both programs, the most obvious being means testing and raising the age of eligibility.