It’s popular around the world. You probably paid it on your last European vacation. But how many Americans understand or even know about the value-added tax?
That will change dramatically, however, if the Obama administration puts it forward as a serious option for generating sorely needed revenue.
Former Federal Reserve Chairman Alan Greenspan this month said that he believes the government will eventually impose some kind of value-added tax, or VAT. Although that’s far from imminent, the VAT debate is starting to intensify. Here are some questions and answers about the value-added tax.
Q: How does a value-added tax work?
A: A tax is levied on the value added to a product at every stage of the manufacturing cycle. It’s collected from each party in the production chain — manufacturer, wholesaler, retailer. Each pays taxes on the amount by which its gross receipts exceed what it paid for the product.
Q: Where is it already in use?
A: It is particularly common in the European Union, where countries use it to pay for national health insurance.
Q: Why are we hearing about it now?
A: The government is spending much more than it’s taking in even without taking into account the proposed expansion of the health care system. This has put pressure on Congress to come up with a new source of revenue.
Some lawmakers have been talking about it, although it remains on a back burner.
Q: Does a VAT tend to hit low-, middle- or upper-income people the hardest?
A: It is a regressive tax, meaning it imposes a greater burden, percentage-wise, on the poor than the rich. That’s because people with lower incomes tend to spend most of their incomes on goods and services.
Q: Wouldn’t that run counter to the administration’s promise to apply tax increases only to the rich?
A: Yes. The White House says it’s unlikely to be used as a way to pay for health care reform. But officials haven’t ruled it out for down the road, and Greenspan and some policy experts think it may be inevitable.
Q: Who supports it and why?
A: A number of economists, academics and influential officials say it’s the most efficient and simplest way to raise the large amounts of revenue needed to keep the government out of crisis.
Q: What do opponents say?
A: Many liberals don’t like it because it’s regressive, while conservatives dislike it as an extra layer of taxes on top of existing income taxes.
Q: So how likely is a VAT to be adopted?
A: It’s unlikely in the short term and anyone’s guess beyond that.
It could become a big issue after midterm elections in 2010 if rising deficits increase the urgency for new revenue and the Obama administration gets behind it.
