Obama insiders buzz over possible Value-Added Tax

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The White House distanced itself from comments made last week by one of its top economic advisers in support of a new national consumption tax — yet others close to President Obama have similarly spoken in favor of a Value-Added Tax in recent months.

Paul Volcker, chairman of the President’s Economic Recovery Advisory Board said during a speech last week to the New York Historical Society that a VAT is not a bad idea for raising revenue. Volcker said it might be unpopular, but would have to be considered to cover entitlement spending.

“If at the end of the day we need to raise taxes, we should raise taxes,” he said.

“Mr. Volcker was speaking for himself and not the administration,” said Kenneth Baer, communications director at the Office of Management and Budget (OMB). “The president has not proposed this idea nor is it under consideration. The president has passed historic tax cuts for middle-class families and continues to push for more tax cuts.”

Baer said last year the VAT was politically problematic, but the Washington Post noted that the president was surrounded by VAT enthusiasts, reporting that “[OMB Director Peter] Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel.”

Ezekiel Emmanuel, currently working in the OMB,  supports a health-care voucher system paid for by a VAT. His 2005 article in Washington Monthly magazine laid out his proposal — he followed up with a book in 2008:

The VAT is efficient, easy to administer, spreads the tax burden broadly and encourages savings … Polls show that many Americans are willing to accept higher taxes in exchange for guaranteed health care.

Despite the administration’s vocal denial that a VAT is under consideration, a string of reports have noted that close presidential advisers want a VAT. From the Wall Street Journal in September:

John Podesta, who is an Obama adviser, said the administration should consider a tax on consumption, such as a Value-Added Tax system similar to that in use in the European Union.

Podesta founded the liberal think-tank Center for American Progress (CAP) in 2003, and in 2008 became the head of Obama’s transition team. He went on the record on Bloomberg TV in September of last year in support of the tax:

A so-called consumption tax would “create a balance” with European and Japanese economies and “could potentially have a substantial effect on competitiveness,” said Podesta.

CAP said Podesta’s comments have been misconstrued.

“John said that it’s something that people have to look into as deficits grow, and CAP has in some of its papers … looked at the VAT as a possible option,” said Anna Soellner, vice president of communication at CAP. “But we’ve never come down and said that the VAT was the way for the administration to go forward.”

“If you look at what Bernanke said even yesterday — it’s something he’s raised, as has Doug Elmendorf. There are many people who say the VAT is one of many options to look at.”

Congressional Budget Office Director Doug Elmendorf said he was fielding many questions from members of Congress about the VAT. As far back as 2007, CAP was on the record touting the VAT:

Unless it was paired with a significant and popular national initiative, such as a revamping of our nation’s health-care system, a VAT is unlikely to be added to our nation’s tax code in the foreseeable future.

Matt Yglesias, a blogger for CAP, told The Daily Caller, “Dealing with our deficit problem is certainly going to require higher taxes. Most economists think that taxes on consumption, like a Value-Added Tax, are more economically efficient than taxes on labor or investment income.”

“In the short-run, nobody’s going to want to raise taxes until the recession is well behind us. I believe the preference in the White House (and certainly my preference) is to first look at reforming the current individual and corporate income taxes to reduce loopholes and deductions before we start thinking up a brand new tax,” Yglesias said.

House Speaker Nancy Pelosi was direct when she said last year it was “on the table,” during an October appearance on the Charlie Rose show.

“The real issue here is whether we are looking at substituting a VAT for some of the inefficient tax policies we have now, or if we are talking about adding it on top of the existing structure,” said Ted Gayer, Senior Fellow in the Economic Studies program at the Brookings Institution.

“I don’t know how [Obama will] ever square this circle of his campaign promises,” Gayer said.

“The intellectual class, the group of people that would advise him would be supportive of it, sure,” he continued. “If they’re ever going to move forward they need to strategize more than just having Volcker talk about it — they need to make sure they have buy-in from many different groups.”

The VAT requires producers of goods to pay a tax on every stage of production. Currently businesses can buy materials tax-free, and a sales tax comes only at the end of the chain. The VAT would fundamentally change the way taxes are collected in the U.S., putting the burden on businesses to collect fees incrementally.

Critics say it is a way to hide a massive sales tax from consumers and increase the size of government. Supporters say it is a fair and progressive tax on consumption that is more effective than current means of tax collection.

Almost 150 countries in the world have a VAT with rates ranging from 5 to 25 percent.

E-mail Aleksandra.