The Value-Added Tax: Key to Deficit Reduction?

The Value-Added Tax: Key to Deficit Reduction?

The Value-Added Tax: Key to Deficit Reduction?

The Value-Added Tax: Key to Deficit Reduction?

Excerpt

For at least twenty years certain segments of the American business community have shown sporadic interest in proposals for an American tax on value added, a form of sales tax that is levied as goods and services move through the production-distribution process rather than only at the retail stage, as under state sales taxes. Initial interest in the value-added tax (VAT) during the 1960s can be traced largely to a belief that substituting a VAT for part of the corporate income tax would improve the U.S. balance of payments. A second wave of interest was created by President Richard M. Nixon's 1972 speculations that revenues from a federal VAT might be employed to lighten the burden of local property taxes used to finance public education. A third round of interest in the VAT, during 1979 and 1980, was cut short by the defeat of one of its advocates, Representative Al Ullman, then chairman of the House Ways and Means Committee.

Interest in the VAT has recently revived. Even before passage of the Gramm-Rudman-Hollings legislation mandating elimination of the federal budget deficit, some business groups saw the VAT as a means of reducing the budget deficit and thereby increasing capital formation and stemming the capital inflows stimulated by high interest rates, inducing a drop in the value of the dollar, and improving the competitive position of the U.S. economy in world markets. The passage of Gramm-Rudman-Hollings increases the likelihood that a significant new source of revenue will be sought within the next few years to deal with the problem of budget deficits.

While President Ronald Reagan continues to say that he will not accept any new taxes, even to meet the targets for deficit reduction in Gramm-Rudman-Hollings, the view that taxes will soon need to be raised is increasingly widely held. Although many observers believe that the VAT is the best vehicle for increasing federal revenues, various other sources of additional revenue have recently been proposed during congressional consideration of income tax reform. These include a tax on imported oil, a tax on all oil, a tax on all consumption of energy, a tax on gasoline, and an increase in excise . . .

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