Can the U.S. learn from New Zealand when it comes to taxes?

Is it time for the U.S. to consider the value added tax (or VAT)—the consumption tax widely used across the Atlantic? I guarantee, it will be a big debate. The head of President Obama’s Economic Recovery Advisory Board, Paul Volcker, stated in an article on CNN, “If at the end of the day we need to raise taxes, then we need to raise taxes.” So, the United States happens to be the only developed country that does not have this VAT (value-added tax), as it is called. Yet, the United States has a $1.5 trillion federal deficit and a debt of more than $12 trillion. Economist argue this tax would “pack a less potent punch” than a rise in income taxes or corporate taxes.

So, what country does it best? Tax experts and economists point to New Zealand, where a 12.5 percent goods and services tax applies uniformly to nearly everything with very limited exceptions--only rent paid for a private home, charitable contributions and interest earned are exempted. (The government offers clear details, too, on its website). “People think it’s fair because it doesn't exempt some folks and not others."

The VAT is essentially a sales tax, except that it's charged at each stage in the development of a product instead of at the moment when the product is sold.

You can bet that deciding what model to use in the United States, or whether the tax will be imposed at all, “will be a furious political debate in the coming months”. Conservatives and tax opponents hate it of course. "There's nothing to love. It will only lead to bigger government," says Daniel Mitchell of the libertarian Cato Institute.

In New Zealand, the value-added tax contributes about 25 percent to the government's bottom line, and the Tax Policy Center in December projected that a 5 percent VAT tax here would generate over $3 trillion in revenue by 2019. That's not enough to cover America's huge debt obligations, of course, but it could be a start. I feel the VAT would cause business owners to be ultimately “holding the bag”. Other things to ponder are what would be exempt from the tax and how it will affect low income Americans versus the wealthiest.

Read the full article here.

Another CNN article explaining the VAT

Watch my appearance on FOX Business regarding the topic from Monday, April 12, 2010.