White House Won't Rule Out Value Added Tax, Which Would Hit All Income Levels

Thursday, April 22, 2010
By Fred Lucas, Staff Writer

White House Press Secretary Robert Gibbs. (AP Photo/Charles Dharapak)

– Economist and former House Majority Leader Dick Armey (R-Texas)

(CNSNews.com) – Economist and former House Majority Leader Dick Armey (R-Texas) said he “always believed” the Democrats would impose a Value Added Tax (VAT) on top of all existing, current taxes when they took control of the House, Senate and White House. Armey also said the VAT is the most “insidious tax of all.”
 
In an exclusive interview with Armey on Capitol Hill, CNSNews.com asked, “Paul Volcker, a senior economic adviser to President Obama, and several members of Congress, including Speaker Pelosi, have floated the idea of the VAT tax being implemented on top of current taxes. Would you support something like that? Why or why not?”
 
Armey said, “Absolutely not. Look, in 1994, I studied – actually, starting in the fall of ’93 – I studied all tax options out there, and I, of course, settled on the flat tax as the best option for a lot of reasons. The Value Added Tax was always the most insidious tax of all, and I always saw that – I’d seen that back in ’77.”
 
“But, I always believed that when the Democrats got the majority in both the House and the Senate – and I’ve told this to people for years – when they get the House and the Senate and the White House, they’re going to add a Value Added Tax to the existing income tax,” said Armey.

Europe's VAT Lessons

Rates start low and increase, while income tax rates stay high.

As Americans rush to complete their annual tax returns today, there is still some consolation in knowing that it could be worse: Like Europeans, we could pay both income taxes and a value-added tax, or VAT. And maybe we soon will. Paul Volcker, Nancy Pelosi, John Podesta and other allies of the Obama Administration have already floated the idea of an American VAT, so we thought you might like to know how it has worked in Europe.

A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is a little under 20%. (See the nearby chart.) In the U.S., a federal VAT would presumably be levied on top of state and local sales taxes that range as high as 10%. Some nations also exempt food, medicine and certain other goods from the tax.

VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%.

Europe's individual income tax rates have fallen since the 1980s, following the U.S. lead in the Reagan era, and European corporate tax rates have come down even more sharply. But the drive of this decline has been global tax competition, not the offsetting burden of the VAT.

In the U.S., VAT proponents aren't calling for a repeal of the 16th Amendment that allowed the income tax—and, in fact, they want income tax rates to rise. The White House has promised to let the top individual rate increase in January to 39.6% from 35% as the Bush tax cuts expire, while the dividend rate will go to 39.6% from 15% and the capital gains rate to 20% next year and 23.8% in 2013 under the health bill, from 15% today. Even with these higher rates, or because of them, revenues won't come close to paying for the Obama Administration's new spending—which is why it is also eyeing a VAT.

One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. >From the 1980s through 2005, deficits were by and large higher in Europe than in the U.S. By 2005, debt averaged 50% of GDP in Europe, according to OECD data, compared to under 40% in the U.S.

Thanks to the recession and the stimulus, U.S. federal debt held by the public has now reached about 63% of GDP and is headed higher, but the OECD forecasts that the 30 wealthiest nations will see debt burdens "exceed 100% of gross domestic product in 2011." Debt levels in France, Germany, Spain and Italy are expected to have increased by 30 percentage points of GDP from 2008 to 2011. Greece has a VAT rate of 21%, but its debt as a share of GDP is 113%.  Read more here.