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It's On: CBO Fielding VAT Questions From Congress

Non-toxic?

11:29 AM, Apr 8, 2010 • By MARY KATHARINE HAM
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White House advisor Paul Volcker made news this week by calling a value-added tax (VAT) "not as toxic an idea" as it's been in the past for tackling the nation's deficit problem. Today, Congressional Budget Office Director Douglas Elmendorf confirmed he's been getting "a lot of questions" about the VAT tax from Congress.

It's On: CBO Fielding VAT Questions From Congress

Ca-ching.

"Many people in Congress are interested in it," he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it's been implemented. "We've had conversations with a number of members and their staffs."

Elmendorf declined to specify which members and said he has yet to field an official request to study a VAT tax. The CBO is in the process of figuring out how best to study a VAT tax's impact, sorting through various structures employed by other countries. Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 debt, which the CBO predicted will be 90 percent of GDP.

In talking about that 90-percent figure, Elmendorf's low-key, clinical assessment drew chuckles from a group of reporters at a breakfast hosted by the Christian Science Monitor:

"That would put us in a very select group of developed countries," he said. "There are relatively few developed countries that have debt-to-GDP ratios that high."

Because a VAT is a national sales tax on consumption, he said, it would have less impact on savings and investment than an income tax, but warned that its economic effects should not be underestimated.

"Economists think about people deciding how hard to work or how many hours to work," he said, explaining that the decision to take a higher paying job or work more hours is partly based on being able to buy more stuff with one's money. "Any wedge between value you're producing for your employer and what you can buy is a wedge that can distort. It is still a tax."

He also warned that politicians and economists should not envision an "idealized" VAT tax as a clean, simple system.

"If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to." he said. "The VAT tax itself could become very complicated."

Elmendorf also sounded a grim note on whether the U.S. could potentially grow itself out of the deficit problem.

"It's not impossible that the problem could go away," he said. "It's also no less possible that it could get a lot worse." The CBO's 90-percent figure was intended to fall somewhere in the middle of all possible outcomes.

Between Social Security, Medicare, Medicaid, defense, and interest on the debt, without any of the other functions of government even considered, the country's spending will exceed its revenues at the end of the 10-year budget window. That does not count new laws that might expand those programs further, but mere institutional growth to keep up with demographics under current law, he said.

"If one wanted to actually balance the budget (without a large tax hike)...one would have to do something about one of those programs," he said. "It's a matter of arithmetic."

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