Movement conservative Bruce Bartlett has penned one of those responsible Republican op-eds Democrats are coming to know and love; and he's written a real one, not a Brooksian poison pill. He argues that Republicans have neither the will nor the desire to seriously shrink government spending, in fact, they've proved themselves as bad as Democrats. With that known, he says, the idea of starving the beast is dead, the gig up, the game over; now we need to figure out how to deal with the coming health care crunch, mindful that politicians haven't the courage to slash health care. To that end, he recommends the Value Added Tax.
A bit of background: The VAT is used by every industrialized nation save America. It's essentially a sales tax levied on manufacturers during each step of the production process. As an example (stolen from Taxing Ourselves), assume this simplified life cycle of bread: A farmer grows and grinds wheat, then sells the resulting flour to a baker for $1. The baker makes dough and sells the bread for $2. And let's assume the VAT is 10%. The farmer, when he sells to the baker, pays 10 cents to the government, because he added one dollar to the product. The baker, when he sells to the consumer, pays 10 cents to the government, because he added one dollar to the product. Had he sold the bread for $3, he would have paid 20 cents, because he added two dollars to the product (.1*2=.2). The tax is paid on the value each added to the product.
Next assume we're baking a rare and expensive bread that takes 15 steps to make. The VAT, of course, is tacked on by the company paying it at each step down the chain. So if each company adds a dollar of value to the bread, by the fifth company, 40 cents have been added to the price (four dollars of value added and taxed at 10%). Every company down the line can deduct what they pay of the VAT off their tax returns, so the fifth company could deduct that 40 cents, the eighth company could take off 70 cents, etc. This'll matter in a moment.
So the VAT, basically, is a sales tax that sounds a bit more complicated because it's collected in stages rather than all at once. So why has virtually every nation that's ever had a serious sales tax converted to a VAT?