Why a VAT is no solution to our budget woes

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By Rep. Joe Pitts and Rep. Jim Gerlach

If you walk into an Apple store in the United States you can walk out with a brand new iPod for around $212. If you purchase from the same retailer in England, you can expect to pay the equivalent of $230. Why the difference? Much of this disparity is because of a value-added tax paid on manufactured products in Britain.

A value-added tax, or VAT, is a type of sales tax paid by raw materials producers, manufacturers, and retailers at each stage of production. This type of tax is common in most European nations, but does not exist in the U.S.

However, this situation may not last much longer. Paul Volcker, one of the President’s top economic advisors, has publicly called for a new VAT. Speaker of the House Nancy Pelosi has said that Congress should look into creating the new tax.

It is certainly true that our federal government is facing a budget crisis; we just don’t believe that a new VAT would balance our budget or allow our economy to create the millions of new jobs necessary to recover from the current recession.

Greece, Spain, and Portugal have all assessed a VAT for decades. None of these nations has used the added VAT revenue to balance their budget. During the economic bubble, tax revenue from the VAT and other sources encouraged these governments to set up lavish public sector benefits and expand government programs.

Now with the economic downturn, many of these nations are facing catastrophic deficits. The VAT didn’t make European governments responsible, why would we think things would be different in the U.S.?

Instead, the VAT is a drag on job growth. The last thing we want to do right now is reduce the buying power of a dollar through new taxes. But with a VAT, consumers would pay more at the cash register, businesses would pay more for accounting and the government would pay more to police tax payments.

Obviously, if you pay more for an iPod or other consumer goods, you will have less money to spend on something else. The VAT has a direct effect on consumer purchasing power.

Right now, sales taxes are only assessed when someone buys a consumer good. When a manufacturer sells a product to a retailer, no tax is assessed. But under a VAT, each business in the supply chain collects taxes. That means additional paperwork and accounting costs. Accounting is a worthy profession, but hiring another accountant to comply with the VAT isn’t going to make a small business more profitable.

The complexity of the VAT system means that the government needs to hire additional IRS agents and auditors to enforce the tax. A 1984 estimate by the Congressional Budget Office showed that a VAT would lead the IRS to expand its workforce by more than 20,000. A new estimate would probably show a significant increase in the number of workers needed to enforce the VAT.

By the end of the year we could see a very serious debate about whether Congress should look to the VAT to balance the budget. The President’s debt commission is searching for ways to balance the federal budget. In Washington one of the most talked about recommendations is the VAT.

Even the President himself has indicated that a VAT should be considered as a way to increase government revenue. We don’t believe that the primary problem is a lack of revenue. Instead, we have a government that has grown beyond its rightful bounds.

From 1982 to 2007, the U.S. created 45 million new jobs compared to only 10 million in Europe. There are many causes for this disparity, but among the chief reasons is a much higher tax burden on Europeans.

We’ve joined together with 155 Members of Congress in a letter calling on the debt commission to reject the temptation to recommend a VAT and instead look for ways restrain government spending. A balanced budget doesn’t have to come at the expense of American jobs.

The U.S. is one of the few industrialized nations that doesn’t impose a VAT. We believe that what makes us different from other nations is what makes our economy the strongest in the world.