Value-Added Tax (VAT) off the table for now

It was not so long ago that observers of America’s political scene, both pessimistic and optimistic, predicted that a Value-Added Tax (VAT) would be the inevitable future of our current spending.

From the Right, Charles Krauthammer opined, “With the passage of Obamacare, creating a vast new middle-class entitlement, a national sales tax of the kind near-universal in Europe is inevitable.” From the Left, Bill Clinton suggested “I think they ought to look at a progressive value-added tax, just because–and I think it’s important the American people understand this–most of our competitors have tax systems like this.”

In this context, conservatives were girding themselves for a massive antitax fight, while liberals were preparing to assuage the inevitable worries created by their critics. 

And then it died. 

The VAT just vanished off the face of the earth. And it’s only now that we’re getting obituaries. According to a recent article in the Atlantic

     “This April, the Senate voted 85-13 for a symbolic resolution that ‘promised” to never, ever consider a value-added tax (read this Flashcard on the Value-Added Tax). A White House spokesperson said the president ‘has not proposed this idea nor is it under consideration.’ But the Wall Street Journal’s John McKinnon presses ahead with a smart overview of the tax, anyway. With a bloodbath in 2012 looming, the White House won’t have the guts to stage a VAT battle until after Obama’s possible reelection, he suggests — especially since corporations will scream about a new tax on their products.” 

Meanwhile, at the Washington Post, Ezra Klein wrote that “nothing good” would come of switching from our current income tax system to a value-added tax. And at the point where one of the more established progressive bloggers is discouraging something, it seems very likely that it’s a lost cause in the near future. 

However, both Klein and the Atlantic admit that the topic could come up in the future, and given the long laundry list of political issues that the Obama administration has been keeping in its back pocket, this seems like a more likely candidate than anything else. At a time when Republicans appear poised to take back Congress, shifting the debate to budgetary issues would be a wise political move, even if trying to introduce a new tax is likely to backfire in the short run. 

Obama advisor Larry Summers is supposed to have said that “Progressives dislike the value-added tax because it’s regressive, and conservatives dislike it because it’s a money machine. It will succeed when conservatives realize it’s regressive and progressives realize that it’s a money machine.”

Glib as this statement is, it sums up a key political and economic point about the VAT – namely, that it has the potential for bipartisan appeal. In fact, one spectacularly similar proposal which was floated as recently as 2008 was nothing less than supposedly right-wing fringe candidate Mike Huckabee’s “FairTax” – a national sales tax which was supposed to replace the entire taxation infrastructure. Granted, one of the key appeals of the FairTax was its perceived ability to wipe out the IRS, but even so, the idea of replacing much of the income tax structure is a welcome idea to many Americans, for whom tax season is an exercise in the worst drudgery. 

The trouble, however, is that if the tax is proposed by Obama, people are unlikely to see it as a replacement for anything, and more likely to view it as an additional revenue-raiser for a President who has revealed himself to be the purveyor of record-breaking budget deficits. Right or wrong, this perception will politicize the debate over the VAT. 

There is, however, one alternative option, which is that the tax could resurface if Obama fails to win re-election, as precisely the sort of “replacement” measure that Republicans could potentially find enjoyable. If that happens, prepare for a fascinating game of musical chairs.