Last Thursday, we released a new value-added tax (VAT) calculator. It’s easy to use, a one-page form that users can adjust to suit their own VAT preferences. The U.S. has no VAT, essentially a national sales tax, but the idea is increasingly in the news, and this calculator shows how much taxpayers are likely to owe if Congress enacts one.
The calculator has two columns. The left-hand side is common to most calculators: the user enters a few fields about his income but no identifying personal information.
On the right-hand side, the user adjusts the "policy parameters" such as the tax rate, the exemptions, and how much revenue the user wants to raise with the VAT. This is where the Tax Foundation VAT calculator gets politically interesting.
When the user loads the page, the default VAT is one that is designed to achieve a balanced budget after 10 years, using a tax base equal to about 37 percent of GDP – this requires a VAT rate of about 13 percent, raising $789 billion dollars annually.
However, let’s say you don’t want to wait 10 years for a balanced budget. You want it now. You can tell the calculator to figure out how high the VAT rate would have to be to balance the 2011 budget. Simply click the “pick a year” option and select “2011.” The revenue goal jumps to $1,405 billion ($1.4 trillion), requiring an exorbitant VAT rate of 32 percent, a sobering reminder of just how high the deficit currently is.
Ideally, a VAT would apply to all purchases (about 70 percent of U.S. GDP), and if it did, we would only need a rate of about 6.5 percent to eliminate the deficit over 10 years. But politics being what it is, such a pure VAT is impossible. If state sales taxes are any guide, it’s likely that at the very least, Congress would please powerful constituencies by enacting exemptions for all purchases related to education and religion, financial and other services, housing, health care and medicine. So we’ve set the default to exclude those, but to tax everything else.
Perhaps you expect that groceries and gasoline purchases would also be exempted from the tax. Simply press the "include consumption of" option and uncheck those two boxes. Notice that the VAT rate (for eliminating the deficit in 10 years) jumps from 13.12 percent to 16.6 percent. As you exclude more and more consumption from the tax base, you need to tax everything else at a higher rate to make up for the lost revenue.
The Administration’s deficit commission is currently playing VAT-god, so our calculator lets the public play along. Have fun!
