It is probably inevitable that the sorry state of the country’s financial condition will give rise to calls for a Value Added Tax (VAT). A VAT is a general consumption tax that is collected incrementally on the value added at each stage of production.
VATs are very popular with politicians as they are semi-hidden, easy to collect and very inclusive. Even if you live under an overpass, you pay the VAT every time you buy anything. VATs are employed by 31 of the 32 members of the Organization for Economic Cooperation and Development (OECD). The VAT, since it is a consumption tax, is very regressive, very effective, and, at a typical 20% rate, raises a great deal of money.
It would seem that the political class cannot decide if our deficits reflect a spending problem or a revenue problem. Any effort to reduce spending or increase taxes would be politically, extremely difficult. This suggests that nothing will be done to reign in deficit spending. As usual, Congress will choose to just “kick the can down the road.”
Investors should remember that the US is largely a consumption economy and that a significant tax on consumption is likely to have an adverse impact on growth.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
