A trial balloon rose over the nation's capital last week when the Washington Post reported advisers within the Obama administration and members of Congress are discussing the merits of a national value-added tax to pay for health care and cover ever-expanding budget deficits.
Value-added taxes are levied on the transfer of goods and services, and are paid by the consumer. They are, essentially, a tax on every commercial transaction. As such, the final user will find the cost of any particular item will increase at least by the amount of the tax. Unlike a retail sales tax, which is charged only at the final point of sale, a VAT is collected as goods move through the production and distribution system.
Recently approved increases in government spending have pushed next year's budget deficit to more than $3 trillion, and the administration projects regularly spending $1 trillion more than it takes in over the next 10 years. At the same time, the president has promised to extend health care to millions of Americans. Proposed hikes on taxes paid by the wealthy won't come close to covering the costs.
Though once rejected as politically unpalatable, Democratic policy-makers have a new interest in a VAT. It would raise huge amounts of money off the hundreds of millions of individual commercial transactions the federal government now does tax.
Governments have legitimate and essential functions that require one or more revenue streams. So when discussed only as theory, no tax scheme is either good or bad. The problems arise in their application. Under the current circumstances, we see great opportunity for mischief if this idea becomes law.
Proponents of the VAT point out the United States is one of the few modern industrial countries that doesn't have such a tax. The VAT had its origins in France in the 1950s, and the rest of Europe has adopted it in one fashion or another. It has funded the generous social service network in those liberal democracies.
As popular as those benefits might be, the VAT is not universally loved by its beneficiaries. In Canada, the VAT is known as the Goods and Services Tax, or GST. Wags there say GST stands for "gouge and screw tax."
In most countries, the VAT has augmented, but not replaced, the income tax system. To one degree or another, the VAT combined with an income tax would allow the feds to collect not only on every dollar you make, but also on every dollar you spend - a truly comprehensive system of taxation.
Critical issues that would determine the VAT's impact on the treasury and on consumers include the tax rate and the possible exemption of some vital goods to lessen the effect on the poor. Both would be tricky issues rife with opportunities for political manipulation.
Proponents cited by the Post said a 10-14 percent VAT would raise enough money to exempt those earning less than $100,000 from the income tax. A VAT of 25 percent would allow the income tax rates of the remaining taxpayers to be reduced, but not eliminated.
Both statements are probably optimistic, if for no other reason because once Congress taps into such a rich source of funding it will find additional needs to fill and spend more and more. An initial rate of 10 percent could quickly become 15 percent, 25 percent or more. We would be surprised if many saw their income tax burden decline.
A VAT would add more than just a financial burden on those who sell products or provide services. It would make every seller a tax collector. The farmer selling hay would have to record the transaction and collect the tax for the Internal Revenue Service. We can't imagine the bureaucracy that would be required.
On its face, a VAT would hit farmers particularly hard. The already hefty cost of inputs would be increased by the cost of the tax. Farmers, who have fewer opportunities than manufacturers and retailers to increase the price of their products, would be unable to pass these additional costs on to their customers.
We think a re-evaluation of the country's finance system is probably overdue. Such a review, however, shouldn't begin with a premise that spending must be unlimited in scope and purpose. If spending could be brought under control, perhaps a VAT could be used to offset other taxes in a new, comprehensive system.
Until then, a value-added tax is too dangerous a weapon to be wielded by the current administration and Congress.
Unsigned editorials are the opinion of the East Oregonian editorial board, comprised of Associate Publisher Kathryn Brown, General Manager Wendy DalPez, Managing Editor Skip Nichols, News Editor Daniel Wattenburger and Senior Reporter Dean Brickey. Other columns, letters and cartoons on this page express the opinions of the authors and not necessarily that of the East Oregonian.