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New Online Calculator Helps Americans Evaluate Value Added Taxes

Washington, DC, October 27, 2010 - The Tax Foundation has added a VAT calculator to its online collection of interactive tools at MyTaxBurden.org.     

Located at www.MyTaxBurden.org/VAT, the calculator estimates how much households would pay in additional taxes if a value-added tax, a type of national sales tax, were enacted in the United States. Extra features allow users to choose the VAT rate, pick a revenue target, and decide which consumer purchases might be exempt.     

"Any proposal to adopt a VAT is a political hot potato," said Tax Foundation Senior Economist Gerald Prante. "Because U.S. fiscal problems are so serious, enacting a VAT without other tax and spending reforms could not close the deficit unless the VAT rate was quite high. The potential impact of such a tax is enormous, and Americans can get a sense of it in just a few minutes with the Tax Foundation's new VAT calculator."     

The highly regarded Republican governor of Indiana, Mitch Daniels, recently spoke of the VAT in less than scathing terms, which created a buzz in Washington because many Republicans believe the VAT to be the revenue source that would enable the U.S. federal government to grow substantially larger than it is now.      

Many "tea party" candidates for office this year favor adopting a national retail sales tax, which is very much like a VAT, but only if most other taxes, including income and payroll taxes, are repealed at the same time.      

Most industrialized countries use VATs, and the rates in OECD countries range from 5 percent to 25 percent. Members of the European Union are required to impose a VAT of at least 15 percent.     

Applying the calculator to some example scenarios, we find that under a VAT large enough to eliminate the deficit by 2020:
  • A single earner making $50,000 a year would owe an additional $3,494 per year.
  • A family of four with one earner making $85,000 would owe an additional $6,097 per year.
  • A married couple, together making $120,000, would pay an additional $8,607 per year.
These estimates can vary greatly because the user of the calculator can pick how much revenue a hypothetical VAT would raise, and he can decide which categories of goods and services are taxable or exempt.     

VAT champions typically describe them as broad-based, low-rate taxes that cause less economical damage than income taxes. However, most existing VATs are riddled with exemptions, special rates, and other complexities that produce a result worse than would be expected from a simple, broad-based tax.     

The VAT calculator is the fourth interactive tool at MyTaxBurden.org, joining the county property tax database, the state-to-state migration database, and the income tax cut expiration calculator.     

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.     

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