Ask Money

VAT? What is that?

Chris Farrell Mar 11, 2010
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Ask Money

VAT? What is that?

Chris Farrell Mar 11, 2010
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TEXT OF INTERVIEW

Bill Radke: America’s budget deficit has achieved another record. The government announced yesterday the deficit for February alone hit $221 billion. Meanwhile, the cost of our entitlement programs is ballooning, and virtually no one is proposing we cut Social Security, Medicare, or Medicaid spending. So, what to do? Marketplace’s economics correspondent Chris Farrell has an idea. Good morning, Chris.

Chris Farrell: Good morning.

Radke: There is a tax you actually really like, Chris. What is it?

Farrell: It’s called a value-added tax. The VAT. And by the way, I’m not alone. More and more people like the VAT.

Radke: What’s the VAT?

Farrell: OK: We’re all used to paying a sales tax, which you pay when you’re at the checkout counter. A value-added tax is collected at every stage of the production and distribution of goods and services.

Radke: A tax at every stage. That sounds complex and bureaucratic to me.

Farrell: Well, it’s a tax, so it probably is complex and bureaucratic. But economists love it because it’s highly efficient, and let me explain why. A simplified example, but: Bill Radke Mines takes out of the Earth iron ore and sells it to Company A. And you roll into the price the value-added tax. And Company A turns the iron ore into plate steel, and they sell it to Chris Farrell, cause I’m an artist and I’ll create a sculpture out of it. And they roll the value-added tax into the price that they sell to me. But then, they file for — and they get a credit — for the value-added tax that they paid from you that you rolled into the price. So what’s happening is you’re only paying a tax on the value that’s added at each stage of the production process.

Radke: Well I have heard of a value-added tax before, but Americans have never gone for it. Why?

Farrell: Well, liberals don’t like it because like any sales tax, it’s regressive, so it falls heaviest on the poor and the elderly. Conservatives, they say, “VAT? Hey, that’s French for big government.” And basically most Congress people that ever pushed for a VAT, well, they got defeated. But here’s the real thing: You know, the VAT is always proposed as an extra tax — we’ve got this income tax system and then we’re going to throw a VAT on top of that. What I think we should do is say yes, we need a VAT to meet our budgetary obligations, but let’s simplify the income tax system along the way. That would make it a much easier sell.

Radke: Marketplace’s economics correspondent, Chris Farrell. Thank you.

Farrell: Thanks.

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