With the national debt growing $2 million every minute, some politicians are exploring new sources of revenue to close the ever widening gap between government revenue and government expenditures.

The Value Added Tax (VAT): A National Sales Tax

One method under consideration by some politicians is the Value Added Tax, or VAT—also known as a national sales tax. A VAT is a tax levied on goods and services consumed. In countries like France, the VAT provides more than 50% of the government’s revenue.

In the United States, a sales tax is levied only when goods are sold to the final consumer. The manufacturers, wholesalers, and everyone who is functionally “in between” the making of the product and the sale of the product do not pay sales taxes on the item. Retail stores collect the sales tax and pass it to the government. It is important to note that the United States federal government does not levy a sales tax nationally; state and local governments instead levy taxes at whatever rates and on whatever goods they determine locally. For example, Delaware, Alaska, Montana, New Hampshire, and Oregon do not have a sales tax.

With the VAT, the retailer pays a tax to the manufacturer. The retailer in turn charges an additional tax only on the “value added” (effectively, their own price markup). The tax rate paid by the consumer at the point of sale is effectively the sum total of the smaller taxes paid by the manufacturer and the retailer. In England, the VAT has been 17.5%; in France the VAT is 19.6%.

Questions and Concerns

Before a VAT could be introduced in the United States, several issues would have to be addressed. The VAT targets consumption, not investment or income, which would proportionally increase taxes on middle and low income people. American taxpayers would likely reject a national VAT if not coupled with a reduction in income taxes, or an overhaul of the tax code that is seen as beneficial. It is also unknown what effect a VAT would have on consumption, as it would be up to politicians to determine the size of the VAT and what, if any, other changes occurred in the tax code at the same time.

While the final shape any VAT would take is unknown, certain things are clear. The VAT is often pitched as a way to reduce the deficit and pay down the national debt, without any real effort on the part of Washington to reduce government spending. This is a problem.

Reducing the federal deficit and the national debt are necessary for America’s financial security, but simply introducing new taxes to boost revenue fails to address the deep-seated structural problems of a government that spends money wastefully and inefficiently.