Mission Critical: Economic Stabilization With a National Sales Tax?
Reviewing the effects of instituting U.S. value-added tax (VAT).
March 26, 2009
The global economic crisis has two diametrically opposed aspects, as things stand today. The first of these has created the current focus on economic stimulus; of getting consumers to consume; of encouraging lenders to lend; and of re-energizing the banking, manufacturing, wholesaling and retailing sectors. In other words, the emphasis is on getting markets back to a reasonable level of their former functionality. Ultimately the taxpayer funds these strategies — in common with virtually all government initiatives — bringing us to the flip side of the issue, which is only now starting to be addressed in any serious way.
It has been estimated that the U.S. will issue somewhere between $2.7 trillion and $4.2 trillion of debt over the next two years. With the federal deficit already racing towards $2 trillion and with many more billions likely to be paid out in funding to U.S. businesses and in stimulus packages before the crisis is over, how will we ever extract ourselves from the deepening debt hole that threatens to drain the economy for generations to come? Even before the current set of circumstances evolved, it was being forecast that spending on Social Security, Medicare and Medicaid alone would overwhelm the entire federal budget within the next 35 years to 40 years.
To address these problems, the limited options open to government include drastically cutting forecast spending, raising taxes or a mixture of both approaches. The Obama administration has already undertaken the job to review entitlement provisions and has set a goal of halving the federal deficit before the end of the current administration but, in the absence of an unlikely root and branch cutting of benefits for baby boomers and beyond, this is unlikely to come close to solving the long-term problem.
Looking at the tax side of the equation, what could be done to raise revenues following from the current climate of tax cuts? It is important to note that increasing corporate income tax rates and social security contributions levels could be a retrograde step, in that the U.S. is already viewed as a somewhat uncompetitive environment from a tax perspective. A joint World Bank and PricewaterhouseCoopers report published in 2006 looked at the total tax burden (including income taxes, employers' Social Security contributions and other non-creditable taxes) imposed on businesses and it ranked the U.S. 102nd out of a field of 175 countries, with an overall tax burden of 46 percent. The inference is that, in this respect, the U.S. is not an especially attractive country for inward (or even internal) investment in what has become an increasingly competitive and international environment over the last decade or more. Put in perspective, the tax burdens of some of the countries that have been more successful at attracting inward investment include the United Arab Emirates (15%); Ireland (25%) and Switzerland (25%); and Singapore (29%). This indicates that the tax "gap" between the U.S. and some of its global competitors is not even close. To exacerbate that situation by raising corporate income and social security taxes could well do more harm than good.
To read this article in entirety, which includes commentary on how imposition of a national sales tax will impact consumers and the benefit this tax could have in attacking the federal deficit, visit Mission Critical: Economic Stabilization With a National Sales Tax? (PDF).
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Chris Walsh, Chief International Indirect Tax Officer, Vertex Inc. is a noted industry leader with more than 25 years of international indirect tax experience.