In Europe, many governments boost their revenue through the value-added tax (VAT). It is also used Australia and Latin America. The VAT is a tax that works by collecting revenues at every stage of product production. So, taxes would be charged to manufacturers when they buy materials, and on down the line as the product is sold and resold. It’s basically sales tax, but it’s collected at stages previous to reaching the end-user. Many economists consider the most efficient way for a government to raise revenue. For consumers here in the U.S., it would likely result in higher prices for consumer goods.
But something needs to be done about a deficit that seems to be growing exponentially every time a politician opens his or her mouth with a new plan to “save” the economy. And, quite frankly, the American people will probably not go for a hike to their income taxes. Just letting the Bush tax cuts for the wealthy expire isn’t going to solve the problem, either. The government has a serious revenue problem. It’s too big for an income tax to solve. The VAT may be just the thing to solve it — since it guarantees and documents that taxes are collected every step of the way. Here is what Fortune has to say about VAT:
The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn’t arouse nearly the uproar caused by increasing income taxes. …
[T]he VAT would be better than the other likely alternative: A higher retail sales tax. If the national sales tax were raised to, say, 20%, consumers would cheat by paying cash to avoid it, and retailers would submit because they’d sell more goods by cutting the price 20%.
VAT hasn’t really been introduced as a serious option yet. Mainly because VAT can actually act as a drag on the economy. One of the ways that VAT may create a slowdown in the economy — at least initially — is by increasing the cost of goods. Charging higher prices is a surefire way to encourage people to carefully think through their purchases and maybe spend less. Wait a minute. Maybe that would be a good thing. Consumers spending less (using mainly debt, of course) and disciplining their purchases…
At any rate, the VAT may become a reality here in the U.S. The income tax is not even close to being enough to cover the amount of spending going on — I’m not even sure how long it will be enough to cover the interest on our massive national obligations. Even seriously cutting programs won’t work. And, unfortunately, the most expensive programs are those that we now consider “essential” (Medicare, defense spending, etc.).
So VAT may be the solution. But one thing at a time. There are still Important Things to throw money at. The government hasn’t time yet to think about where that money will come from.