National sales tax idea getting fresh look

WASHINGTON — With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a moneymaking idea long considered politically taboo: a national sales tax.

Common around the world, including in Canada and Europe, such a tax — called a value-added tax, or VAT — has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Tim Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama's policies, the chairman of the Senate Budget Committee said a VAT should be part of the debate.

"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad, D-N.D., said. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of virtually everything, from a carton of eggs to a visit with a lawyer. It also is hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using proceeds to pay for health care for every American, a benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off — maybe. Or you could pay for it progressively and they'd come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health-financing plan that targets corporations and the rich.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for a health-care overhaul. "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," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House Chief of staff Rahm Emanuel and author of the 2008 book "Health Care, Guaranteed." Meanwhile, former Federal Reserve Chairman Paul Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his VAT plan. "It's common to the rest of the world, and we don't have it."

The surge of interest in a VAT is testament to the extent of the nation's money troubles. While some conservatives long have argued that a consumption tax would provide a simpler, more efficient alternative to the Byzantine U.S. income-tax code, this time it's all about the money.

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors that are growing increasingly uneasy about the security of their investments. Unless Congress comes up with serious cash, expanding the nation's health-care system will add to the problem.

Obama wants to increase income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress.

Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but Congress is balking there, too.

Key lawmakers are considering other ways to pay for an overhaul of health care, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money: nearly $1 trillion over five years, according to White House budget documents.

But options on the table would raise a fraction of that sum. And while it might pay for health care, it barely would dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

Enter the VAT, one of the world's most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers each are required to record transactions and pay a portion of the VAT, the tax is hard to dodge.

It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.