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[bob ford <bobford79 AT yahoo.com>]

Many people have thought as this type of t*x as a 'replacement " for the 
income t*x.  Now, because of the bail-out, nationalized healthcare, all of 
the other social programs, we are possibly looking at a VAT to be in 
"addition" to the income t*x..............................

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SPECIAL REPORT AMERICA'S MONEY CRISIS 
    
A European-style tax?

Like it or not, there's only one way we're going to be able to pay for our 
ballooning deficit: a value-added tax.

By Shawn Tully, editor at large
Last Updated: December 2, 2008: 9:27 AM ET



NEW YORK (Fortune) -- It's highly possible, if not inevitable, that Americans 
will soon live under a radically different tax system - one that the pundits 
and politicians aren't talking about.

It's called a value-added tax, or VAT, and it's been used for decades to pay 
the bills and sustain the immense growth of governments around the world, 
from France to Mexico to Australia. Created in 1954 by a French economist, 
the VAT is the most potent, efficient machine for revenue generation yet 
invented.

And if there's one thing the U.S. government needs as the federal budget 
balloons, it's a ton of new revenue. "The bottom line is that the income tax 
cannot support the level of spending that's projected, something other 
countries faced years ago," said Roberton Williams of the Tax Policy Center, 
a non-partisan research institute. Today the VAT raises almost half of the 
total government revenue in France, and a similar share in most of the 
developed world. 

The VAT is essentially a sales tax, except that it's charged at each stage in 
the development of a product instead of at the moment when the product is 
sold. 

Take, for instance, a car with a sticker price of $30,000 and a value-added 
rate of 10%. Ford might buy its steel and other materials for $8,000 plus 
$800 in a VAT tax. A dealer then pays $25,000 plus a $2,500 tax for the 
finished vehicle. Ford takes an $800 credit for the tax it already paid and 
sends $1,700 to the government. A buyer then pays $30,000 for the SUV and 
$3,000 in taxes. The dealer collects the $3,000, takes a credit for the 
$2,500 worth of taxes already paid, and sends $500 to tax authorities. 
Ultimately, the government pockets $3,000, or 10% of the retail price of the 
car, in taxes. 

The genius of the VAT is that, while the consumer pays it, the actual cash is 
mostly collected from producers before it reaches the retailer. Since the VAT 
is essentially a hidden charge embedded in the price of goods and services, 
raising the VAT doesn't arouse nearly the uproar caused by increasing income 
taxes. 

The ease with which a VAT can be increased points to one of its big 
drawbacks: Governments see it as an easy way to pay for increased spending, 
which is a potential drag on economic growth. 

Even so, the VAT would be better than the other likely alternative: A higher 
retail sales tax. If the national sales tax were raised to, say, 20%, 
consumers would cheat by paying cash to avoid it, and retailers would submit 
because they'd sell more goods by cutting the price 20%. With the VAT, every 
step of the manufacturing (and tax collection) process is documented.

Make no mistake: A VAT may be unavoidable in the United States. The reason is 
that spending is rising far faster than the revenue that can conceivably be 
generated by the current tax regime.

Keeping the budget afloat
Let's examine the numbers. Under our current tax system, receipts are 
projected to remain pretty flat, at about 18% to 20% of GDP, far into the 
future. But spending is slated to rise to 24% of GDP in 2030 and 28% in 2050, 
excluding interest on the federal debt. If taxes aren't increased enormously, 
future deficits, and the enormous borrowing they require, will swamp the 
budget with ruinous interest costs.

Today, the income tax raises around $1.1 trillion, or around 9% of GDP, with 
payroll and corporate taxes contributing the balance. The deficit now stands 
at around $580 billion, including the Social Security surplus that's helping 
to pay the bills. But that surplus is also rapidly disappearing. So to 
balance the budget, America would need to raise income taxes by 53%, assuming 
the other taxes remained at current rates.

The gap gets far larger in the future, chiefly due to rapidly rising costs of 
Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an 
extra 2% of GDP. That would require an additional $270 billion in income 
taxes.

All told, that's a total tax increase of $870 billion, or almost 80%. That's 
not including the estimated $240 billion cost of President-elect Barack 
Obama's healthcare plan through 2018.

The rub is that the fiscal pillar America has relied on since 1913 - the 
federal income tax - can't possibly support the looming new era of spending. 
All economists agree that when top income tax rates get too high, Americans 
will work, save and invest less. Tax collections would increase far more 
slowly than rates, and eventually level off completely.

The VAT may be the only answer. "We're moving towards European levels of 
spending," said Andrew Biggs, an economist at the American Enterprise 
Institute "If you go there, you need a more efficient way to raise revenue."

But the VAT, on top of encouraging bigger government budgets, has another 
problem: Middle class taxpayers would be hit harder by a VAT because they 
spend more of their income on goods like clothing and cars than high-earners. 
That's especially distressing to Obama and Democrats, who have pledged to 
make the tax system far more progressive by raising rates for the wealthiest 
Americans.

One partial solution would be to exempt staples such as food, gasoline or 
fuel oil from the VAT and impose extra-high charges on yachts and jewelry. To 
help middle-class taxpayers, the federal government could also send subsidies 
to tens of millions of taxpayers based on their incomes. The French, for 
example, mail checks to families depending on how many children they have.

But given the nature of politics, said Biggs, "the problem is that those 
rebates might be tied to some social agenda, not to making the system fair."

European governments have typically seen VAT hikes as an easy way to raise 
revenues during a recession. In some countries, government spending is more 
than 50% of national income. The results have been fiscal stability, but 
lackluster growth and a dearth of dynamism and entrepreneurship.

Given the budget numbers, the United States has already chosen a path of far 
bigger government. The trap has been set. It's unlikely America can escape 
without a VAT. 

http://money.cnn.com/2008/12/01/news/economy/tully_vat.fortune/index.htm