Friday, August 31, 2012

US: RISING FISCAL DEFICIT

From $1.4 trillion in 2009, the US fiscal deficit is projected to hit an alarming $1.6 trillion this year. One alternative that perhaps can save US from collapsing is the implementation of a nationwide VAT. by Manish k. Pandey

In fact, Uncle Sam at present needs a revenue generator and VAT is just that. “VAT has the potential to generate a large amount of revenue. US consumer spending totals some $10 trillion annually, or about 70% of GDP. The actual tax base will likely be far smaller; most countries with value-added taxes exempt food at grocery stores (7% of US spending) and medical goods and services (21% of spending). Yet, even if half of all spending were exempt, the VAT’s revenue potential would be large,” Scott Hoyt, the US based Senior Director of Consumer Economics at Moody’s Economy.com tells B&E. Even a Congressional Research Service (public policy research arm of US Congress) report suggests that each 1% of VAT has the potential to generate $50 billion. That’s certainly big money. Besides, it could also prove good for economic growth. Since in VAT saving is taxed less than consumption, people are likely save more, making more money available for investment.

However, critics of VAT argue that they are inflationary, pointing to the rise in prices that typically occurs when a VAT is introduced. “It’s a one-time change and need not contribute to accelerating prices unless it raises inflation expectations or is accommodated by the Fed in a way that introduces sustained inflation. Under reasonable policy assumptions, neither of these need happen,” says Hoyt. Even White House adviser Paul Volcker, who is known for successfully beating down inflation while serving as Federal Reserve chairman during Ronald Reagan’s tenure, feels that a European-style VAT will help US in bringing down its deficit. “ VAT, a levy on all the goods and services you consume, is not a toxic idea,” he was quoted by CBS MoneyWatch.com a few months back.

Certainly VAT has great potential. Even if it’s started at a low level, say 5-10%, it can generate big money. But, thanks to political enthusiasm, it doesn’t seems to be happening anytime soon. While Obama has promised no tax increases for 95% of the Americans, most Republicans shy away from “Tax” in any form.

But then, crisis paved the way for reforms, and America’s fiscal position is certainly not less than a crisis. This may be the last chance for US to reform its non-paying tax structure, something last done in 1986.


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