VAT Thing You (Don't) Do

As worries about the growing federal deficit have risen in Washington, so has chatter about the possibility of implementing a VAT, or value added tax. Sen. Kent Conrad and Speaker Nancy Pelosi have both indicated interest, and Congressional Budget Office chief Doug Elmendorf noted earlier this month that his agency had received "a lot of questions" about the tax, which would levy fees on value added at each stage of production.

But it now looks like the Senate has put the kibosh on this idea, at least for the moment:

The Senate went on record Thursday as overwhelmingly opposed to a value-added tax—something much talked about by Democrats and those close to President Obama of late—approving by 85-to-13 a resolution declaring the penalty a "massive tax increase that will cripple families on fixed income."

Twelve Democrats and one Republican, Sen. George Voinovich of Ohio, voted against the resolution, which was sponsored by Sen. John McCain, Arizona Republican.

At this point, without any legislation on the table, it's easy to think of the VAT as a streamlined revenue-raiser, simple and straightforward and highly effective at raising revenue. But I think Elmendorf is right to caution that, in reality, any policy that actually passed probably wouldn't be so simple.

"If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to." [Elmendorf] said. "The VAT tax itself could become very complicated."

My caution to VAT supporters, then, is not to think about it in its pure, white-paper form, but to think about how it might actually look after everyone in Congress—and all their associated interest group allies—got their hands on it.