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Value-added tax: not the tax we need.

Value-added tax: not the tax we need

For over 20 years, I have participated in the debate on a federal value-added tax (VAT) and its viability as the answer to our nation's tax policy woes. Changes in our national and the world economies in the late 1980s encouraged the proponents of a VAT to mount yet another charge for the adoption of such a system. But I remain resolute: a VAT will not cure the budget and tax ills plaguing this country.

I continue to be against VAT for a number of traditional reasons - which continue to be relevant today - and some new ones.

* A VAT is regressive. Consumers in the lower income categories pay a greater proportion of their income under this type of tax than do upper income consumers. * A VAT is inflationary. When the tax is put into effect, it would cause, at a minimum, a one-time major increase in the price of all goods and services. * A VAT raises administrative costs for both government and business. The government would have to bear the cost of enacting, interpreting, and auditing compliance with the new law. Business would incur the cost of training, reporting, and remitting the tax. * VAT proponents have failed to provide sufficient evidence that it would increase personal savings and significantly improve this nation's trade imbalance. * These drawbacks have been more than sufficient over the years to prevent the enactment of a VAT or any of its repugnant hybrids, such as the national sales tax and the business transfer tax.

What's changed?

The recent adoption of a value-added tax by Canada and Japan has spurred VAT's supporters to push for a VAT as a cure for our trade deficit problem. They make this claim because the General Agreement on Tariffs and Trade (GATT) would treat a VAT as an "indirect tax," one that can be imposed on imports and excluded on exports. In contrast, the primary business taxes in the U.S. - the corporate income tax and employer contributions to the social security fund - are considered "direct" taxes, which GATT says must be included in the pricing of exports. So VAT proponents maintain that a VAT would improve the U.S. trade balance by reducing the cost of U.S. exports and increasing the cost of foreign imports.

The problem is, of course, that a VAT must be coupled with a substantial decrease in our existing "direct" tax base if it is going to have any chance of improving our trade balance. It is inconceivable that the American public would accept substantial cuts in traditional business taxes for the nation's largest businesses in exchange for some VAT concept that very few Americans would understand. Are members of Congress willing to address the political backlash from such a proposal?

And there is some question if a VAT actually benefits trade. Economists don't agree on this issue. In fact, the inability of a VAT to cure the trade deficit was reaffirmed by the Joint Committee on Taxation in its May 30, 1991, report ("Factors Affecting the International Competitiveness of the United States"), in which the committee concluded that border tax adjustments provide neither incentives nor penalties for international trade.

During the past several years, VAT proponents have focused on another issue to bring the debate once again to the fore. They argue that the VAT is a cure for the federal deficit.

The revenue-raising power of a VAT is indeed significant. Estimates vary, but we anticipate a 5-percent VAT would raise $150 to $175 billion annually. VAT proponents maintain that the additional revenue a VAT would generate would be used to eliminate the deficit. This is naive, given Congress's appetite for spending. Is it logical to believe that this additional revenue will somehow be "sacredly" earmarked for deficit reduction and that Congress will have the political will to curtail spending?

By increasing revenues, a VAT would simply encourage more government spending. And even if Congress would allocate VAT revenues to the budget deficit, how can these same revenues be used to cure the import/export problem? Maybe we could impose a 10-to 15-percent VAT to pay for both, but that high a rate would accelerate inflation, the worst scenario for our struggling economy.

A final issue: the interrelationship of federal and state tax policy. Historically, states view a federal VAT as an encroachment on their sources of revenues - and in fact it would be. The general sales tax is the largest source of state tax revenue, providing almost 33 percent of such funds in 1989. Only five states do not have a sales tax. Because a VAT and a sales tax are similar, the states consider VAT a duplication of a tax they have traditionally employed.

The General Accounting Office undertook a report on tax policy ("State Tax Officials Have Concerns about a Federal Consumption Tax," March 1990) to provide Congress with an overview of the concerns state tax officials have about the enactment of a broad-based federal consumption tax in the form of a federal retail sales tax or a value-added tax. When the state officials were asked if they favored or opposed a broad-based federal consumption tax to decrease the national deficit, 68 percent said they opposed a federal VAT. Those who opposed a federal VAT were asked if they would change their minds if states were offered a share in the revenue with no strings attached. A scant 12 percent said yes.

The state and federal relationship continues to be strained because of the actions of the 101st Congress. Over the next five years, states anticipate a $29-billion increase in expenditures because of the federal government's shifting of Medicaid costs to the states, requiring Social Security coverage for state and local government employees and increasing federal taxes on gasoline, alcohol and tobacco, traditional sources of state revenues.

We know that the core of our federal tax policy malady is a federal deficit that continually mandates revenue-driven legislation. But the tax policy goals that guide us into the 21st century should be simplicity, stability, and efficiency. We cannot endorse a tax policy that's regressive, inflationary, and a catalyst for additional spending. A VAT would merely be a vehicle to speed us down the road of continued massive deficits. It will not cure our tax policy ills.
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Title Annotation:Management Strategy
Author:Byant, James P.
Publication:Financial Executive
Date:Sep 1, 1991
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