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ANALYSIS: How political pressure is preventing a US VAT

With the US needing to cut its deficit, it is inevitable that talk in some corners is turning to VAT once again, but the fierce political backlash unleashed whenever a politician supports the idea could prove an insurmountable barrier to it ever becoming a reality.

The strength of political opposition to a VAT was plain to see when Republican senator John McCain introduced an amendment in 2010 denouncing the tax as a measure which would delay the US recovery and cripple families.

The McCain amendment received overwhelming support, passing through the Senate by 85 votes to 13. Almost all the House Republicans subsequently sent a letter to the President's Commission on Fiscal Responsibility and Reform urging them not to look at a VAT.

Peter Merrill, of PwC, who previously held the role of chief economist of the Joint Committee on Taxation of the US Congress, said a number of US politicians have expressed support for a VAT in recent years, notably Paul Volcker who headed the Economic Recovery Advisory Board.

“Volcker’s support for a VAT triggered a significant backlash,” said Merrill. “Every time deficit reduction comes to the forefront of politics in the US, people start saying let’s bring in a low-rate VAT to raise revenue, but then there is a significant political backlash from both the left and the right.”

And this perhaps sums up the extent of the political barrier to VAT in the US. It is a tax that simultaneously defeats the ideologies of Republicans and Democrats.

“The left says it would be a regressive tax and would hurt families because it is a consumption tax and low income families consume more of their income,” said Merrill.

“While the right opposes it by arguing it would become an unlimited source of income for government and they could increase it whenever there was a shortfall in revenue, rather than control spending,” he added.

Mark McCormick, a managing director for Alvarez & Marsal Taxand, said the more liberal-minded politicians are in a catch-22 situation when it comes to VAT because of it regressive nature.

“I don’t expect to see anything happen in the next year,” said McCormick, “if President Obama is re-elected, I think it would be mid second term before the idea of a VAT gets serious consideration.”

“It will also depend on what happens in the elections because if the Republicans maintain control of the House and take control of the Senate, it would be difficult for President Obama to get a VAT passed,” he added.

In addition to political opposition there is criticism from a business perspective in terms of the additional compliance burden a VAT would impose.

Merrill said under a VAT every business would be responsible for collecting tax on their sales and would need to keep track of tax on what they purchase.

“Businesses would need new accounting systems, they would have to file returns once a year but would need to remit tax on a monthly or quarterly basis,” said Merrill.

“It requires a big effort from businesses in terms of education and training and software acquisition – the government could potentially subsidise some of this as it has done in other countries but I am not sure whether that would happen in the US,” he added.

Nigel Mellor, of Deloitte, said VAT has been politically unpopular for the 40 years it has been debated in the US and has found little support from Democrats, Republicans, business groups, or the public.

“Leaders in individual states also have concerns about implementing a national VAT. Such a levy could require significant changes in the tax structure of states, especially those that rely heavily on a sales tax for revenue generation,” said Mellor.

There is heightened tension over VAT in the US because of the federal system. Many US states impose their own sales tax and would be concerned that a federal VAT would eat into some of their revenue.

Merrill said it is hard to see how the fiscal gap can be reconciled without some sort of new broad-based tax as the existing taxes cannot be increased enough to achieve this, but it certainly appears it is not on the horizon for a while yet.

“For the time being it, seems as though political pressure would be too much of a barrier to introducing a VAT in the US,” said Merrill.

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