With a rapidly growing federal debt often described as "unsustainable," politicians are looking for ways to increase revenue to feed increased spending by the federal government rather than seriously cutting federal programs.
One tax that has not been seriously considered before in the United States is a value-added tax or a "VAT" for short. While some readers have commented that new taxes will not be placed on American consumers because President Obama had promised that the new spending would not impact Americans other than "the rich," it would be naive to assume that the current spending levels will not impact all of us in some way.
A value-added tax is now a common consideration in political discussions and likely to become more frequent.
For example, a VAT is "on the table" to help the U.S. address its fiscal liabilities, according to House Speaker Nancy Pelosi (D-CA) who made the remark in October 2009. The new tax, even if it does become a reality, will not be implemented right away. Pelosi said that any new taxes would come after the Congress finishes the healthcare debate and that it may come as part of a larger overhaul to the tax code.
A Value added tax (VAT) is a consumption tax placed on any value added to a product during the manufacturing process. This is different than a sales tax, because the sales tax, at least in the United States, is charged only when the final sale is made to the consumer.
In short, a VAT would increase the cost of just about everything, from buying groceries to paying an accountant to provide tax or financial advice.
According to an article in the Washington Post, "a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250…."
Most of us have never experienced the reality of a value added tax. The tax is popular in Europe and finances the government programs popular in Europe and which are now being put into place in the United States.
Living With a VAT
This year, a good friend named Bob advocated I should travel to the south of France as it is one of the most beautiful places in the world.
Never having been to southern France, and being a lover of good food, red wine, and open to new experiences, I added this trip to my "bucket list" of things to do while still alive and healthy enough to enjoy it.
The trip quickly moved to the top of the list. With the recession in full swing, we found a relatively good deal on air fare and flew into Nice, France during the waning months of the summer to personally experience the ambiance and beauty of this part of the world.
We picked the town of Saint-Rémy-de-Provence as a central location.
It is a town of about 12,000 people with numerous hotels, restaurants, and a long history. We quickly discovered the local bistros located throughout the town. Bistros are not five star restaurants but often described as small restaurants serving moderately priced simple meals in a modest setting.
My friend’s description was accurate. The food was excellent and there was a wide variety of it. Armed with a decades-old education of American high school French, I was able to speak enough French to quickly convince most waiters to speak English. We were able to experience the joy of relatively simple French cuisine and local wine not generally available in American wine shops.
Our first meal in St. Remy was delightful. But, having expected a simple, tasty and well-prepared meal at a modest price, I almost swallowed my American Express card knowing that we were going to be there for a few days and eating well a couple of times each day. Two meals, with one or two glasses of wine in a modest restaurant was typically around $90.
There are several reasons for the price. The value of the American dollar is falling rapidly as our debt is increasing. The lower value of the dollar means higher prices when paying in Euros. And, in addition, each meal included the cost of the value added tax which added about 20% to each meal. Finally, a service charge of 15% is automatically added into each check. Most diners leave a small tip in addition to the 15%.
In short, a good meal in a modest restaurant that would be about $40-$45 in most of America is now about twice as much in a modest French bistro. And, of course, a full meal with wine and the various taxes in one of the fine dining establishments of Paris or other large cities would quickly top several hundred dollars. (Or, at least, that is what I was told by other tourists who had ventured south after starting their European vacation in Paris.)
Renting a Car
As noted above, a value added tax impacts everything. For example, when renting a car in the United States, there is a sales tax that is added plus, in some locations, a local tax as well.
Renting a car in Europe is more expensive. For example, a very small compact Ford with a manual transmission was about $567 for a one week rental. The taxes amounted to about 90 Euros or, roughly, $125.
Paying for the Highways
In America, we take free interstates for granted. There are exceptions. In the Northeastern United States, we recently found several major routes charging a toll for using the fast highways and, as the need for additional revenue by governments at all levels becomes more acute, we can probably plan on paying more in tolls when using our faster roads.
Highways are expensive. And, when the government is providing a wide variety of social services from extensive job benefits to health care and old age services, the money has to come from some source.
In France, those who use the highways pay for them. Our trip was about three hours and the tolls were approximately 50 Euros. That means that a round trip cost about $150 in tolls—plus the charge imposed by credit cards for the currency conversion service.
Putting Gas in a Car
The raw price of gas is about the same in America and in Europe. One big difference: the maximum tax in this country on a gallon of gas is about 17%. In Europe, the taxes amount to about 70%. That means that, instead of about $2.60 a gallon, the actual cost of gasoline is closer to $6.50 a gallon.
I did not travel to Europe to see what life was like with a VAT and, despite the cost, relished the experience of the trip.
Many Europeans have lived with the VAT for years. There is political stability that comes with acceptance and Europeans have come to accept the high taxes as the price of having an all-encompassing social net along with the greater government control over their lives and the higher unemployment that usually accompanies such a system.
We are not used to a VAT here. If it comes to pass, chances are most of us will not pay a federal income tax as the VAT will cover the greater amount of spending. But, if it does come to pass, as it has in Europe, we can expect higher prices and, over time, presumably come to accept tax of as much as 25% as a normal part of life that one cannot do anything to change.
But, for those who think such a tax system will not happen in America, you may want to think again. With the current federal debt at approximately $1.7 trillion a year being added to the $12 trillion or so that has already been spent, the money will have to be raised with resources other than continually expanding debt. With politicians now floating their "trial balloons" to gradually introduce the concept into our lives, there is a good chance a VAT or other similar tax will be part of our lives in the not-too-distant future.