A Value-Added Tax for America?

By Schultz, Thomas D.; Sullivan, Dennis H. et al. | The CPA Journal, October 2011 | Go to article overview

A Value-Added Tax for America?


Schultz, Thomas D., Sullivan, Dennis H., Gould, Michael S., The CPA Journal


The U.S. federal government's budget deficit is at an alarmingly high level. According to the Congressional Budget Office (CBO), federal spending has exceeded revenues by well over $1 trillion per year since 2009. The projected total deficit for 2011 of 9.3% of gross domestic product (GDP) is expected to follow this trend, which is in sharp contrast to the average annual deficit of approximately 2.8% over the previous four decades. In addition, the amount of debt held by the public has also increased significantly - from a 40-year average of 37% of GDP to an anticipated 70% of GDP by the end of this year ("CBO's 2011 Long-Term Budget Outlook," Publication 4277, June 2011). Although the spike in federal deficits and outstanding debt is partly a consequence of the policies adopted to counteract the recent recession, the CBO notes that these statistics also reflect an imbalance between spending and revenues that predated the downturn in the U.S. economy. This differential is at the heart of current political debates regarding the nation's debt ceiling and the actions that are necessary to help balance the nation's budget.

The likelihood of continued shortfalls at the federal level has reignited the discussion among various constituencies over a value-added tax (VAT). In Washington, a VAT has been mentioned by members of both the Republican and Democratic parties as a potential means of raising revenue and narrowing the deficit. Its efficiency at raising large sums would help to offset current spending and, potentially, provide a means for permanently reducing income taxes. Another motivation for renewed interest in the VAT is that the aggregate tax base is consumption, not income, which fits well with the widespread conviction that future growth in the American economy requires a greater emphasis on savings and investment. In the current policy environment, a VAT could arise as a legitimate complement to the existing U.S. tax system.

In 2010, President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform, charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability in the long term. Overall, the recommendations of the commission were consistent with broadening the tax base and acknowledging that the relatively high corporate statutory tax rates put U.S. businesses at a competitive disadvantage relative to their foreign counterparts. Although the commission did not formally address the potential of using a VAT as a mechanism for raising revenue, VAT proposals have been suggested by individual members of the U.S. Congress and various task forces. For example, the Bipartisan Policy Center estimates that a 6.5% "debt reduction sales tax," which would operate like a VAT, could raise as much as $3 trillion between 2012 and 2020 (PricewaterhouseCoopers LLP, "Tax Policy in a Deficit-Driven World: 2011 Tax Legislative Outlook," January 2011).

How Severe Is the Current Deficit?

Because the federal budget deficit is influenced by macroeconomic trends that affect other developed economies, a comparison of U.S. and foreign deficit levels can provide a sense of how well America is responding to economic challenges compared to other countries. Exhibit 1 compares the ratio of annual government surplus (deficit) to GDP in the United States and other member countries of the Organisation for Economic Co-operation and Development (OECD) over the past two decades. Although deficits were reported in all but a few years, the United States performed better than average up until the early 2000s and the burst of the dot-com bubble. But even during the relatively healthy economy between 2003 and 2006, the United States failed to balance its budget and, in the past three years, it has reported deficits 5% greater than the OECD average. When compared to historical trends and other countries, the recent U.S. budget shortfalls do not represent favorable performance. …

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