The Obama Administration has been considering a national sales tax to help shore up budget deficits and pay for costly programs, namely health care. The VAT (Value Added Tax) is already in effect in some states. The proposed national VAT would be an additional sales tax. Instead of the money going to the individual states, the money would be going to the federal government. With the White House calling for a fundamental reform on the tax system, the national VAT has gained popularity. Before politicians start touting the great benefits a national VAT will have, it is important to understand the consequences of implementing such a tax mechanism.

The VAT will tax the transfer of goods and services. The proposed rate being discussed by the White House is 10%. A national VAT is already used in some European countries. An estimated 130 countries use a national VAT tax. The main argument for the use of a VAT is the simplicity and the amount of cash generated. Most lawmakers are discussing the VAT as a replacement for income tax for certain tax brackets. If this would happen, millions of tax returns would not be filed; citizens would effectively be paying their taxes whenever they make a purchase. Additionally, the VAT is expected to raise more money per citizen, than collecting taxes based on a citizen’s annual income. Since companies are required to track their transactions, dodging the VAT would be very difficult. The VAT will also create an environment where saving money is encouraged and spending money is discouraged. The current income tax code is incredibly old, some even argue outdated, and overly complicated. The VAT would be collected automatically and is simple.

Many details need to be discussed before a National VAT can gain any real traction. For instance, how would on-line purchases be handled? Currently, not all purchases accrue a sales tax, it mainly depends on the state the merchandise is being purchased. Which specific tax brackets would be eliminated if the VAT is implemented? It is important that any VAT plans be thoroughly explored and all details scrutinized.

It is very important that any changes to the tax system be made for the benefit of the American people, not to the benefit of the federal government. The current rhetoric suggests that the main motivating factor for considering a national VAT is to raise more money for the federal government. This is not an acceptable reason for implementing this new tax system. For too long, the government has been in a tax and spend lifestyle. The VAT is hardly a solution, but is simply an escalation of the cash flow environment that runs Washington. It is grossly more important to reign in spending and increase the efficiency of federal dollars, than to simply collect more taxes.

Even though a national Value Added Tax is a simpler and more modern way of collecting taxes, it is important to do thorough research to make sure it is a better solution for the American people, rather than the politicians in the government.