Taking the value-added tax seriously
THE hour may soon be at hand for American policymakers to give serious consideration to enacting some version of the consumption, or value-added, tax (VAT), widely used as a major revenue-raiser by most of our European allies. True, it was only a year ago that the Reagan administration considered and rejected the value-added levy as a component of its 1985 tax overhaul blueprint. But the circumstances of the United States political economy have changed enormously since then. The perceived merit of tax reform for its own sake is fading. Today's Realpolitik is that any major tax overhaul should also have a trade and deficit-reduction component. And it's this increasing perception of a possible three-in-one remedial linkage between reforming of our US tax system, reducing the federal budget deficit, and improving our foreign-trade balance that's so pivotal in the rising interest in VAT -- as well it should be. After all, across Western Europe, a VAT provides a way (1) to raise large revenues with less pain and less effect on economic growth than an overburdeni ng income tax and (2) to usefully and lawfully attune national tax systems to trade considerations (VATs are levied on imports and rebatable against exports, thereby promoting the latter).
Advocates suggest that the US may need to begin shaping its tax system in this same direction. Deficit and trade arguments are voiced as often as the need to ease income tax brackets. Reports that the Japanese may be contemplating a VAT approach only underscore the argument that US taxation methods must also be structured to international considerations. Meanwhile, the alternatives suggested by the Gramm-Rudman budget deficit reduction mechanism are also spurring Congress to contemplate new revenue poss ibilities.
This cumulating economic logic has also begun to change the political equation. On the national level, two present or former presidential candidates have more or less endorsed a consumption tax. Former Republican Senate majority leader Howard Baker has urged a national sales or energy consumption tax in the cause of deficit reduction. And 1984 Democratic nominee Walter Mondale said in a recent interview that he would accept a value-added tax ``if it's necessary to get us out of this radical
impasse on the budget.'' Former President Richard Nixon, too, has expressed a belief that we may have to move toward a consumption tax.
More present and former GOP economic officials are openly indicating support. In an October speech to the Food Market Institute, former Budget Director David Stockman contended that we've about reached the limit on spending cuts and that the tax burden on corporations and businesses shouldn't be raised much, so ``what we're going to have to do is tax our own consumption.'' He said that either ``a sales tax, value-added, or some hybrid in between is what we're going to have to do,'' and ``the value-added
is the best'' alternative. Earlier that month, Charles McLure, former deputy assistant Treasury secretary for tax policy, the somewhat chastened main architect of the Treasury I and II tax proposals, told the National Association of Business Economists that if we can't cut spending, ``we should start thinking about a national sales tax or value-added tax.''
Former Deputy Treasury Secretary Charls Walker, chairman of the American Council for Capital Formation, who is now stepping up his longstanding effort for a VAT-type tax, contends that under the right circumstances, White House chief of staff Donald Regan and Treasury Secretary James Baker could yet bring the President along. Indeed, Business Week has reported that Alfred H. Kingon, Donald Regan's White House domestic policy chief, ``is attracted to the idea,'' while Deputy Treasury Secretary Richard Da rman's interest is longstanding, albeit subordinated since spring.
Consumption tax backing is especially strong in the US Senate. Press reports have even suggested that the business-transfer tax (BTT) version of a VAT, sponsored by Delaware Republican Sen. William V. Roth Jr., may soon command a majority in the Senate Finance Committee. Besides Mr. Roth, prominent Finance Committee members interested in a BTT include the Republican chairman, Bob Packwood of Oregon, and the two senior Democrats, Russell Long of Louisiana and Lloyd Bentsen of Texas. Similarly, Senate Bu dget Committee chairman Pete Domenici of New Mexico allowed the other day that if current tax reform fails, ``something like a VAT or a consumption tax will come along.'' Parenthetically, although pro-consumption tax sentiment is distinctly weaker in the House Ways and Means Committee, it's widely accepted that the Senate Finance Committee must serve as the critical launching pad.
Major business organization support is also rising. The American Business Conference, the National Association of Manufacturers, and the American Council for Capital Formation are already on record as favoring a move toward consumption taxes. And Paul Huard, the NAM's vice-president for taxation and fiscal policy, recently told an interviewer that still other business groups -- including several ``who wouldn't have a year ago'' -- are also quietly looking into the BTT/VAT option.
This pressure should continue to grow. On one hand, economic circumstances are likely to keep pushing policymakers toward a consumption tax as a simultaneous approach to the critical US budget deficit, trade balance, and tax system inadequacies. Parallel political coalition opportunities also seem to be developing. Strategists have begun to ponder the trade relevance and mega-revenue potential of a BTT/VAT as a unique opportunity to unite supply-side tax-bracket-cutters with traditional deficit-reducers
and neo-protectionists aroused over the imports flooding into the US.
The consumption tax could be an idea whose time has come. And if so, it could well emerge as the prime innovation of any 1986 tax reform.
Kevin Phillips is an author, commentator, and publisher of The American Political Report.