An American VAT? Don't Bet On It.

| Wed May 27, 2009 11:31 AM EDT

The Washington Post has an article today arguing that the value added tax (VAT), which is popular in Europe and used in more than 130 countries, is getting a "fresh look" in the United States. Hogwash.

A value added tax is like a sales tax that applies at every stage of the production cycle. The tax is collected from wholesalers and raw materials suppliers, not just retailers, but the end result for consumers is the same, since the businesses pass their tax costs down the supply chain. Other countries have found VAT useful because the costs of collecting it fall largely on businesses, not government, and because its structure discourages the black markets that high sales taxes often create. And economists say VAT doesn't discourage work, savings, or production as much as some other taxes do. But most liberals don't like VAT because, like sales taxes, it's regressive—its burden falls disproportionately to the poor.

According to the Post, Kent Conrad, the Democratic chair of the Senate budget committee, is giving the VAT a look-see because the Dems are hoping to find a way to pay for universal health insurance. Well, it may be "on the table," as Conrad said, but VAT isn't going anywhere soon. When you consider the politics of the situation, it seems pretty clear that the Dems are trying to look like they're considering all the options. But any sort of significant VAT isn't really in the cards. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," Kenneth Baer, a spokesman for White House Budget Director Peter Orszag, told the Post. That's a long way of saying that VAT is an interesting idea that isn't politically viable right now. Consumption taxes raise the final prices of goods and services. Consumers would definitely notice even a modest VAT when they bought their apple pie, beer, and baseball tickets. Do the Democrats, now at the height of their power, really want to be blamed for instituting a new regressive consumption tax in the middle of a recession? Don't bet on it.

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