[Note: updated on 2.16.2011]
What is a VAT?
A value added tax (VAT) is a consumption tax on the "value added" to a product by a business. While a sales tax occurs once at the time of purchase, a VAT, as well as collections and remittances to the government, happens each time a business in the supply chain buys the product from another business. Businesses can also recover VAT on the products they buy in order to produce further goods to be sold to another business or the final customer, so the tax levied at each stage is a constant fraction of the value added by a business to its products. Most of the cost of collecting the tax is borne by businesses and there is a stronger incentive for them to collect it than with a sales tax. But as with the sales tax, only the end consumer is taxed.
What's the significance?
As concerns about the US budget deficit rise, many see potential in the revenue that VAT could generate, which could be in the billions. But VAT is thought by some to be a regressive tax, meaning that the poor pay more than the rich, because it falls on consumers of products. Proponents counter that taxing income is too arbitrary and that VAT is proportional, as the wealthy pay more at the same rate that they consume more. Some countries that have implemented VAT have bolstered the progressiveness of the tax by reducing other taxes that fall on the poor. Its effects on different groups can also be altered by which goods are taxed at different rates and where the revenue is spent.
Who's talking about it?
Roosevelt Institute Senior Fellow Bo Cutter calls for VAT as part of an overall economic recovery and reform package...But Roosevelt Institute Senior Fellow Jeff Madrick worries that VAT is regressive and takes more from poor people's pockets...Demos, EPI and The Century Foundation reject including VAT in their alternative to Obama's deficit reduction committee report...Back in April, Obama seemed to leave the possibility of VAT on the table...On the other side of the aisle, Heritage and Big Government worry that VAT just means higher taxes and more government spending...The Senate discussed the possibility of a VAT in a hearing by the budget committee...Some thought that Obama's support for a corporate tax cut may have been to get Republicans on board with a VAT.