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Value added tax: Senate weighs a tax reform Reagan once shunned

As president, Ronald Reagan, was 'not enthused' by the idea of a value added tax (VAT) in America. But at a Senate hearing this week, tax reform experts pushed for it.

By Staff writer / February 2, 2011

A focal point of the discussion was whether the US should impose a value-added tax (VAT), which would be similar to a federal sales tax. Ronald Reagan declared in 1985 that he was 'just not enthused' by the idea.



Here's one thing on which Republicans and Democrats generally agree: Reforming the US tax code is needed and could give a major boost to America's fiscal and economic health.

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But the political challenge – how to settle the details of reform – was visible Wednesday in a hearing on tax reform held by the Senate Budget Committee.

A focal point of the discussion was whether the US should impose a value-added tax (VAT), which would be similar to a federal sales tax. Other advanced economies lean heavily on such taxes as a way to efficiently collect revenue in a way that's compatible with economic growth.

It's an idea that has long been controversial, especially with Republicans. Ronald Reagan, in the spotlight this week because of the 100th anniversary of his birth, declared in 1985 that he was "just not enthused" by the idea.

One concern, then and now: A VAT could become a backdoor tax hike that might be out of view to most Americans.

Fast forward a quarter-century. Republicans at Wednesday's hearing weren't ruling out a VAT, but they weren't declaring themselves enthused, either. It remains a tough sell politicially for a variety of reasons. (Note, though, that President Reagan himself didn't say "never" back in 1985.)

Tax policy experts at the hearing, including a prominent conservative, said the idea should be a centerpiece of tax reform.

"All roads are going to lead to a VAT," said Lawrence Lindsey, a former top economic adviser to President George W. Bush. "If we want to be competitive, that's where we're going to end up."

Here's the chain of logic.

Both sides say the current tax code is a complex mess that harms US job growth, while other nations are using better-designed tax systems to lure corporate investment.

Tax reform could help the economy, and by making tax collection more efficient it also has the potential to reduce the persistent federal budget deficit. Politically, too, tax reform appears easier for both parties to strike a deal on than, say, health care reform.

A makeover of the tax code could occur simply by streamlining existing rules for personal income and corporate taxes. The VAT would add a further twist: Proponents say it could help to roll back incentives for corporations to add jobs and factories outside the US rather than inside.

"It really is our central economic issue," Mr. Lindsey said during the discussion with senators.

No one argues that a VAT alone will solve US competitiveness problems. But Lindsey said that such a tax, levied on all business receipts, could be "border-adjusted" so that it didn't tax exported goods. That way US exports wouldn't be taxed twice – once in the US and once by another nation's VAT.


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