Next Time, Look at Real Reform : Value-Added Tax Would Do Several Things ’86 Bill Doesn’t

The tax-reform bill is moving toward enactment by Congress. But whether the measure in its final form tilts more toward the House or the Senate version, it will not do several things that need doing for the good of the U.S. economy.

The “reformed” tax system won’t do much if anything to encourage the savings that are needed to finance the modernization of U.S. industry. The measure sidesteps the need for more revenues to help bring the massive federal budget deficit into balance. And it does nothing to reverse the frightening imbalance in the nation’s international trade.

All of which means that the issue of real tax reform has only been postponed. Congress will soon find itself having to deal with the question again. And when that time comes it won’t be surprising to find the so-called value-added tax, or VAT, being taken very seriously indeed.

The value-added tax, already widely used in Europe, is a sort of sales tax applied at various stages in the production and marketing chain. In the final analysis the tax is paid by the ultimate consumer.

Such a tax has several advantages.

To begin with, it is hard to cheat on the VAT. Proponents believe that the value-added tax would bring in billions of dollars annually by reducing the size of the “underground economy”--the unreported income from moonlighting and other off-tax activities that are believed to total about $132 billion a year. In short, the cheaters would be forced to help the rest of us pay the cost of government.

Another advantage of the VAT is its potential as a revenue-raiser from the legal economy--roughly $20 billion a year would be collected for each percentage point of tax that is imposed, minus whatever offsetting reductions are made in the income tax. If overall taxes must be raised to bring the bloated federal budget deficit under control, polls indicate that most people regard sales taxes as the least objectionable form of tax increase.

From the standpoint of national economic health, another major advantage of the VAT is that since it would tax consumption rather than income, it would encourage savings that could then be channeled into industrial investment. As things stand, the U.S. savings rate is far below that prevailing in Japan--which is one explanation for American jobs lost as a result of Japan’s superior economic performance.

Perhaps most important of all, a value-added tax--under international trade rules--can be imposed on imports into a country using the VAT system but rebated on that country’s exports to other lands. On the other hand, international rules allow for no rebates for income taxes paid on the profits from exports, nor can an in-lieu tax be legally imposed on goods imported into a country that depends on income taxes instead of the VAT.

As things stand, therefore, American industry operates at a distinct competitive disadvantage with the French, West Germans and other Europeans who use the value-added tax. Adopting a VAT would help level the playing field.

A look at the present economic situation illustrates the need for the kind of help that would be provided by a value-added tax.

Less than six months ago, economic analysts were predicting a robust performance by the U.S. economy in 1986. In fact, economic growth has proved anemic, and prospects for substantial improvement in what remains of this year are dubious.

Joblessness dropped to 7% in June, but that figure is misleading. Manufacturing jobs fell by 56,000 in June, bringing to 159,000 the reduction in manufacturing employment since the beginning of the year. The National Assn. of Purchasing Management reports that its latest survey of industrial companies showed declines in production and new orders.

Making things worse, there is a virtual depression in the oil and gas industry. And more bad news--for the first time in decades the United States is now importing more farm products than it is managing to sell in other countries.

Meanwhile, the Supreme Court decision gutting the Gramm-Rudman act reduces the pressures on Congress to balance the budget by cutting spending. The truth is that, while everybody favors cutting government spending in the abstract, most of us oppose significant cuts in programs that benefit yours truly--whether we’re talking about medical care for veterans, FHA loan guarantees or farm subsidies.

Politically, a tax increase may be more palatable than cut-to-the-bone spending reductions. But if the VAT is so attractive, why hasn’t it been adopted already?

For one thing, the value-added tax got a bad name among politicians when Rep. Al Ullman (D-Ore.), the chairman of the House Ways and Means Committee, was defeated in 1980 after advocating passage of the VAT. In fact, however, there are other, more persuasive, reasons for his defeat.

Liberals tend to resist the VAT on the ground that all sales taxes are regressive--that is, they hurt poor people more than the well-to-do. Most VAT proponents, however, would exempt food purchases from the tax. And ordinary people, in any event, tend to favor taxes on consumption because they have some degree of control over what they spend and therefore pay in sales taxes.

Conservatives tend to fear the VAT because it would be too painless; the average citizen wouldn’t realize how much money he would be forking over to the tax collector. The point is valid--in this country the VAT should be offset by income-tax reductions except to the degree that higher revenues are needed to control the federal budget deficit.

Enactment of a VAT is unlikely as long as Ronald Reagan is President--but the Reagan era will end in 30 more months. After that, some of the shrewdest tax experts in the country believe that the value-added tax will be accepted as the least bad of available alternatives. When that day comes, the loudest gnashing of teeth will come not from the beleaguered taxpayer, who will enjoy offsetting benefits, but from America’s trade competitors, who have a good thing going and would like to keep their advantage.