The value-added tax, or VAT, is the most widespread and successful taxation scheme in use around the world today. More than 140 nations utilize the value-added tax system as a means of building government revenue.

Unfortunately, the VAT also acts as a means of unofficially blockading imported goods. The value-added tax is plugged on to every good and service inside the economy. In so doing it makes domestic alternatives more fiscally or economically responsible as consumer items.

Every time a nation joins the World Trade Organization, or signs into a new free trade agreement, it almost always replaces the now illegal “import tariffs” with a completely legal national consumption tax – almost always in the form of a VAT. The new national consumption tax acts just like a tariff, but it does so within the legal confines of the WTO and other international accords.

The only developed economy, or undeveloped economy for that matter, to have completely missed the bandwagon is the United States. Even Canada and Mexico maintain and operate VAT systems, all while still being full members of the free trade zone created by the North American Free Trade Agreement. Canada charges U.S. producers an access fee for their economy. Mexico charges U.S. producers an access fee for their economy. The United States has nothing of the sort.

This lack of border-adjustment is not the only reason for the dilapidated condition of America’s domestic economy, nor is it the only reason for our huge imbalances in international commerce. However, it is a major part of an overall system that keeps America uncompetitive on the international marketplace.

In 2009, each of the top trading “partners” of the U.S. utilized the value-added tax. Canada (5 percent), China (17 percent), Mexico (16 percent), Japan (5 percent), Germany (19 percent), the United Kingdom (17.5 percent), South Korea (10 percent), France (19.6 percent), Taiwan (5 percent), and Brazil (ranges from 5-25 percent) each carry a VAT.

When an American good is sold in those countries the cost of the good is marked up by whatever the VAT demands. After paying to produce and ship the good, we must then pay to simply get the good through customs and into the hands of our buyers. At the same time, those same nations can easily export goods to the United States with zero additional charges at the border.

The value-added tax allows nations to build revenue through taxation, and thus guarantees their financial stability, but it builds revenue on foreigners as well as domestic residents. In the U.S. we tax our own citizens and then ask foreign countries to loan us the difference. Everywhere else in the world they tax their own citizens and then charge foreign corporations for entry access to their market.

Former Vice Presidential candidate Pat Choate recently tabulated how much distortion the value-added tax imposes on the United States. His figures show an annual average of more than $550 billion paid out by companies as part of VAT systems. This money goes into the coffers of foreign governments; it pays for their bullet trains, alternative energy plants, universal health care, and free/subsidized access to a university education. For years progressives have called Washington to take the lead and help America catch up in each of these areas.

For years conservatives have complained that there is simply not enough money. Every year we pay into the socialized health care, high-speed rail infrastructure, and alternative energy production of every nation in the world. Every year we continue to ignore our own needs in these areas due to lack of funding.

If the United States had a value-added tax, it would have to institute the new tax as a part of its comprehensive tax reform. This is what every other nation on earth has already done. First, you lower income taxes, and lower corporate taxes, leaving more money in the pockets of companies and individuals who can then go out and buy things in the economy. You then replace those lost taxes with a national consumption tax and build revenue on the things that people buy. Completing this tax reform would take several years to fully implement, and certain safe guards would have to be built in to ensure the tax did not become overly regressive.

In 2009 the United States imported $1.9 trillion worth of goods and products. If we had in place just a 10 percent VAT we could have raised $190 billion from those imports. Instead, the federal government gained nothing. If we had a VAT on par with world averages (15-19 percent) we could have raised $280-360 billion in just one year.

Such vast sums would easily cover the $100 billion needed to fund comprehensive health care reform and a single-payer universal system. Such funds could be used to build vast high-speed passenger rail networks between busy hubs on the East and West Coasts. These funds could go to alternative energy research, electric car production, the space program, and our underfunded public education system.

There are no simple solutions, and the VAT doesn’t solve the problems of earmarks, government waste, carte blanche military spending, or deficit spending. What it does do is provide funding for projects that are currently ignored or overlooked. Washington will always find ways to waste money (see: Iraq and Afghanistan), the least it could do is employ innovative ways of raising some.

Click Here to Learn More About the Value Added Tax (VAT)

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