UK leaders on Tuesday announced a rise in their value-added tax from 17.5 percent to 20 percent, which, because the U.S. has no VAT of its own to counteract the effects, will result in imports from and exports to the UK becoming more expensive.
Ultimately, the tax increase, which is expected to raise $19.42 billion annually, will likely result in an increase in America’s trade deficit, which has been known to lead to job loss. If America had its own VAT, the effects of the increase would be minimal.
But, unlike over 150 other nations in the world, America refuses to implement a VAT.
There is support in high places for a national consumption tax that would mirror the VAT of other nations around the world.
In recent months, House Speaker Nancy Pelosi, former Federal Reserve Chairman and member of President Obama’s Economic Recovery Advisory Board Paul Volcker and John Podesta, former White House chief of staff under Bill Clinton and co-chairman of President Obama’s transition team, all floated the idea of instituting a VAT to combat runaway federal deficits.
"My tax philosophy would be if we can't deal with our expenditure loan with the present tax system, we've got to think about changing the tax system," Volcker said. "When you think about changing the tax system, given the problem that we started out talking about, you've got to talk about some tax that hits consumption."
A VAT, which makes up 19 percent of the revenue in Organization for Economic Cooperation and Development nations, could go a long way toward balancing the budget, encouraging savings, reducing the trade deficit and lowering income taxes for many Americans.
According to some estimates, a value-added tax of just 7 percent would cover the projected $1 trillion budget shortfall in 2020. Because it would tax consumption, a VAT would penalize spending and reward saving. American goods and services would be on par with their foreign counterparts and allow U.S. businesses to compete on a level playing field, and millions of low-income Americans could see their tax rates reduced or eliminated altogether.
Unfortunately, there doesn’t seem to be much will to implement a VAT in the halls of Congress, where tax increases are anathema to members forced to run for reelection every two to six years.
In April, in a 85-13 vote, Senators struck down the idea of implementing a European-style value-added tax in a non-binding resolution that called the VAT a “a massive tax increase that will cripple families on fixed income and only further push back America's economic recovery.”