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VAT: more eggs with less squawk?

By Richard L. Strout / January 28, 1983



President Reagan sends his budget message, deficit and all, to Congress on Monday. I am still thinking about the advance question put by Henry Fowler here last week, ''Why don't we try VAT?'' Mr. Fowler was secretary of the Treasury, 1966-1968. He was talking about ''value added tax.'' Like every one else he is aghast at deficit financing.

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The US Treasury is in bad shape; nobody really knows how big the deficit will be. Peter G. Peterson, secretary of commerce, 1972-1973, has organized a group called the Bi-partisan Budget Appeal, which asks that Mr. Reagan and Congress cut $50 billion or $60 billion from the deficit for fiscal year 1984.

At a joint press conference all living former Treasury secretaries were present, or else called in by telephone. They all had warnings. Together they are an impressive group.

Aligned with them are some 500 business leaders all over the country.

Mr. Peterson denounced the ''unprecedented, unending, growing, grotesque deficits'' and others did, too. Former Treasury secretaries Fowler and John B. Connally (head of the Treasury 1971 and 1972) asked about VAT.

Most European nations have VAT; the United States is about the only one of the 24 members of the Organization for Economic Cooperation and Development (OECD) that doesn't. All European Common Market countries have adopted it; it is a tremendous money-raiser.

VAT is a concealed national sales tax. A sales tax is less progressive than a graduated income tax on which the US largely relies. Theoretically VAT is harder on the poor than the income tax (though often there are moderating tax features, like exemptions of room and board).

But the big thing about VAT is the money you raise. To put it crudely, you get more eggs from the chickens with less squawk.

Technically a value added tax is a levy placed on each step of the production process. Here's a finished loaf of bread at 80 cents. A plain sales tax of 10 percent means rich and poor buy it for 88 cents. It's all open, and the buyer is reminded of the tax.

But under VAT the farmer pays a 2-cent tax on his 20 cents' worth of wheat. The miller pays 2 cents on the 20 cents in value he added in milling. (Note that he is allowed to subtract the 20 cents he paid the farmer before calculating his own value-added tax basis.) And so on . . . A tax added in baking, another by the grocer in retail distribution.

Instead of being collected at the end of the line when the consumer pays for the final product and sees it, the tax is partly collected along the line from producers and distributors who make and market the product.

It sounds terribly complicated but becomes fairly routine as each group automatically identifies its own particular addition and hands it on to the next. The consumer winds up paying most of it in higher prices.

There's another important international aspect of the system that affects foreign trade. The exporter is permitted to subtract VAT, perhaps all the way up the chain, if he sells the product outside the country. American exporters charge that this is a way of undercutting the price of their goods in foreign markets; a kind of concealed subsidy. ''We're the only major industrial nation in the world except Japan that doesn't have a value added tax,'' said former Treasury Secretary Connally last week on ABC News. ''Most other countries raise most of their money through it.''

VAT is often attacked by liberals, defended by conservatives. There were some moves toward it in the early '70s and then it was dropped. It is still largely theoretical in the United States. What everybody agrees on is that it's an enormous money-raiser. And that the US budget rarely needed money more than now.

''How about VAT?'' said Mr. Fowler.