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.
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Other changes – such as aligning corporate tax rates closer to rates in other nations – could also help level the field, witnesses at the hearing said.Skip to next paragraph
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Why did Reagan say in 1985 that the VAT idea didn't excite him, even though he was embarking on a major bipartisan tax-reform effort?
"A value-added tax actually gives a government a chance to blindfold the people and grow in stature and size," he said at a news conference. "That tax can quietly be increased, and all the people know is that the price went up and they don't know whether the price went up because somebody got a raise or whether the company wanted to increase profits or whether it was government."
He also argued that the federal government would be intruding on the terrain of states, since many states rely heavily on sales taxes for their revenue. But his main argument was that the VAT would be more or less hidden, compared with income taxes.
"Taxes should hurt in the sense that people should be able to see them and know what they're paying," Reagan said.
Some Republicans at Wednesday's hearing voiced similar themes.
Sen. Patrick Toomey (R) of Pennsylvania worried that a VAT, paired alongside an income tax, would make it easier for politicians to raise taxes. Rates for both taxes would start relatively low, so increases might not feel so bad to the public.
Where Democrats are open to the idea of adding a VAT alongside a simplified income tax, Lindsey proposed that a VAT-type tax be implemented as a substitute for other taxes. "Adding yet another layer of complexity on top of what we already have would be among the worst ideas we could come up with," he said in his prepared testimony.
Another middle-ground approach, raised by some Democrats at the hearing, would add a VAT while eliminating income taxes for most Americans, and retaining the income tax on high earners. Such a plan has been outlined by Michael Graetz of Columbia University Law School.
Both liberal and conservative tax experts say that, with or without the VAT, it's vital that Congress move toward greater fiscal stability. On the current course, the nation is set for high annual deficits and an ever-rising national debt.
[Editor's note: The original version of this article incorrectly stated that the hearing on tax reform held by the Senate Budget Committee was held on Tuesday. It was actually held on Wednesday.]