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Door to a Consumption Tax Remains Closed, for Now

Tom Williams/CQ Roll Call File Photo
Camp, the chairman of the tax-writing House Ways and Means Committee, has not dismissed the ideas behind consumption taxes, although he is hardly a backer.

Among Republicans, the fear has been that a consumption tax would turn out to be a money machine, putting an end to their larger goal of squeezing down the size of government. Democrats have rejected the idea on the grounds that it would impose more of a burden on low- and middle-income earners than those at the top of the income distribution.

And for Republicans, in particular, consumption taxes have earned a bad name because of their association with European value-added taxes, which are essentially sales taxes collected at each stage of the production process but also carry the air of European values viewed with suspicion in much of the United States.

In fact, value-added taxes have become ubiquitous around the world, enabling governments to support large social-welfare programs and attract investment by lowering their corporate tax rates.

Of the 34 developed countries that belong to the Organization for Economic Cooperation and Development, the U.S. is the only country without a value-added tax at the national level. Even including state and local governments, the U.S. raises much less revenue through consumption taxes than other countries. The U.S. is also taxed less heavily overall, and it has to borrow more to finance its government than most other countries in its peer group.

To many economists, the U.S. is simply living on borrowed time before the simple mathematics of taxation brings the country around to the rest of the world. Experts say the U.S. might be able to last another few years, or even a couple of decades, without adopting a national consumption tax, but eventually an aging population and rising health care costs will force policymakers to raise taxes in the least economically harmful way possible.

One reason investors maintain their “confidence in the U.S. is that, for all the politics back and forth and for all of our complaining about our taxes, the actual total share of taxes in the U.S. economy is relatively low by international standards,” Adam Posen, president of the Peterson Institute for International Economics, said in an interview. “There is this sense that as long as things don’t get totally out of hand, if push came to shove, the U.S. could overnight impose a national sales tax.”

Regardless of whether adopting a consumption tax is necessary, it certainly would make life easier for lawmakers as they strain to find a way to both reduce the deficit and lower the corporate tax rate, which, at 35 percent, remains the highest in the developed world.

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