NCPA - National Center for Policy Analysis


February 8, 2005

Bill Thomas (R-Calif.), chairman of the House Ways and Means Committee, who is all for private accounts in principle, is wary about using Social Security money to fund them, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

So, how would Thomas fund private accounts: through a value-added tax, or VAT.

  • An enticing feature of the VAT is that it is rebated on exports and applies to the full price of imports, so foreigners pay part of it.
  • Currently, every time an American firm exports to Europe, in effect it pays the tax, whereas European firms that export to the United States do not.
  • This mechanism arguably gives countries with a VAT a competitive advantage over those without one, such as the United States, which is now the only major country on earth without such a tax.

Enacting a VAT would also help address the nation's competitiveness problem if it is used to offset some or all of the corporate income tax, which cannot be rebated on exports under world trade law. Even after those offsets, a 10 percent VAT -- half the rate prevalent in Europe -- would still leave money to fix the Alternative Minimum Tax (AMT) and other glaring tax problems, thus fulfilling the President's promise to reform and simplify the tax code.

  • Past efforts to enact a VAT have failed mainly because it is regressive; that is, it takes more from the poor than the wealthy in percentage terms.
  • But rebating some of the tax into the personal accounts of poor people could redress this problem.
  • It could work something like the existing earned income tax credit, which was created to offset the payroll tax burden of workers with no income-tax liability.

Source: Bruce Bartlett, "Want Reform? Talk to Bill: Does Bill Thomas have a bargain in his pocket?" Fortune, February 7, 2005.


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