Value-added tax: not the tax we need.

• Author: Byant, James P.
• Position: Management Strategy

Value-added tax: not the tax we need

For over 20 years, I have participated in the debate on a federal value-added tax (VAT) and its viability as the answer to our nation's tax policy woes. Changes in our national and the world economies in the late 1980s encouraged the proponents of a VAT to mount yet another charge for the adoption of such a system. But I remain resolute: a VAT will not cure the budget and tax ills plaguing this country.

I continue to be against VAT for a number of traditional reasons - which continue to be relevant today - and some new ones.

* A VAT is regressive. Consumers in the lower income categories pay a greater proportion of their income under this type of tax than do upper income consumers. * A VAT is inflationary. When the tax is put into effect, it would cause, at a minimum, a one-time major increase in the price of all goods and services. * A VAT raises administrative costs for both government and business. The government would have to bear the cost of enacting, interpreting, and auditing compliance with the new law. Business would incur the cost of training, reporting, and remitting the tax. * VAT proponents have failed to provide sufficient evidence that it would increase personal savings and significantly improve this nation's trade imbalance. * These drawbacks have been more than sufficient over the years to prevent the enactment of a VAT or any of its repugnant hybrids, such as the national sales tax and the business transfer tax.

What's changed?

The recent adoption of a value-added tax by Canada and Japan has spurred VAT's supporters to push for a VAT as a cure for our trade deficit problem. They make this claim because the General Agreement on Tariffs and Trade (GATT) would treat a VAT as an "indirect tax," one that can be imposed on imports and excluded on exports. In contrast, the primary business taxes in the U.S. - the corporate income tax and employer contributions to the social security fund - are considered "direct" taxes, which GATT says must be included in the pricing of exports. So VAT proponents maintain that a VAT would improve the U.S. trade balance by reducing the cost of U.S. exports and increasing the cost of foreign imports.

The problem is, of course, that a VAT must be coupled with a substantial decrease in our existing "direct" tax base if it is going to have any chance of improving our trade balance. It is inconceivable that the American public would accept substantial cuts in...