When the more prominent D.C. tax lobbyists begin to call for the adoption of a VAT to fill the seemingly bottomless deficit, the rest of us perhaps should sit up and take notice.

It helps that the lobbyists are tied to the party that has historically opposed a VAT most strongly. The laugh line has always been that that party would drop its opposition to the VAT when it decided that the fear of creating a “money machine” for governmental growth was less than the advantage of shifting the tax base more to workers.

And, of course, a VAT whose revenue stream would be dedicated to a governmental project that all agree has to be carried out fits that bill. Health care is becoming such a project.

There will be substantial investigation of the possibility of converting the corporate income tax into a “subtraction method VAT.” This would be calculated like the regular income tax, except that all purchases would be expensed. A key question would be whether borrowings should be included in income, and debt reduction deducted. Business would strongly resist that, but, without it, the ability to expense all purchases is an open invitation to zeroing out the tax base at will.

The subtraction method VAT offers the benefit of not requiring a new tax system (not to speak of replacing the business income tax). However, we are told that no other developed country (or perhaps any country) has a VAT that is other than a credit method VAT. This is a parallel tax system, not like a sales tax and not like an income tax, that would presumably require a “new IRS” to administer it. Getting over that hurdle will be hard.

But once surmounted, the credit method VAT will be like a “money machine.” Like other consumption taxes, it has the “advantage” of being like the FICA tax: it will mostly apply to 100 percent of the incomes of workers and a rapidly declining percentage of the incomes of the more well-to-do. For that reason, it is not likely that a VAT can be layered on top of a system that also applies the FICA tax and an income tax to workers. Therefore, at least the exemptions for the income tax will have to be increased to remove millions from its rolls.


If this sounds pretty complicated, it will be, but it does depend on some basic moving parts that are almost all political: universal health care, the deficit, dissatisfaction with the income tax among the general population, a desire to “hide” the payment of tax (which a VAT would do) and the import-export implications of a credit method VAT (not mentioned above, but often thought to favor the taxing country).