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VAT: The Stop-Gap Solution?

A close look at the American budget deficit reveals disturbing facts. The future seems to be hurling towards a fiscal trap wherein there is no other recourse but to increase taxes or implement value-added tax (VAT). As a very unpopular issue though, no one wants to discuss taxes, particularly not when it’s their political careers on the line. There are several figures that had championed these initiatives though particularly Nancy Pelosi for VAT and Mike Huckabee for the replacement of income tax with levy.

However, on the whole, VAT and any increases in any type of tax remains as a favorite topic among think tanks and the academic community. The administration’s budget chief Peter Orszag has already dismissed these ideas as “popular with academics but not seriously considered by policy makers”. This isn’t necessarily good news for Americans.

Most people in the United States only have a vague idea of what it entails. And even if they learn more about it, they most likely wouldn’t want it because it goes against the current American model. It is more closely associated with the social democracies in Europe. This may no longer be an option though. The sheer largeness of the deficit in the economy makes it inevitable for the country to eventually adopt VAT.

Basically, VAT can be likened to the sales tax that is currently in place. However, if the sales tax is passed exclusively to the end-customer, the VAT puts a tax on everything used, whether products or service, during the production process. It is a tax on consumption.

One of its advantages is its virtual fraud-free feature. On the negative side, VAT is viewed as a regressive tax. Lower-earners tend to pay a larger percentage of their incomes into VAT compared to wealthier individuals. For this measure to become unnecessary, either one of these two need to occur: dramatically high growth rates or substantially decreased government spending.

The former is not likely to happen given the slow recovery. And the Obama administrated doesn’t seem keen on the latter if the new budget is any indication. With this being the case, it seems that VAT will really become America’s destiny.

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