For those confused by the question, we are challenged every day by the prospect of future taxation.  The word from every source seems to be there is only one direction for taxes and that is up.  Coupled with severely crimped revenues from the Great Recession and federal government outlays that are attempting to prime the private sector pump, this conclusion appears inexorably on the horizon.

The fiscal crisis appears to be gaining greater traction as an issue both financially and politically.  Whatever your politics, our national, state and local governments have tremendous revenue needs.  How shall government collect necessary revenue from those near wealthy folks while protecting the majority of the American public?  There seems a growing awareness that there is not sufficient revenue available from the $250,000 and above crowd to meet growing revenue needs.  So absent an about face that will expose more middle class and lower income earners to greater income taxation, how is this problem to be answered?

There have been more voices recently heard calling from the wilderness that a realistic answer may be the valued added tax (VAT).  This is a tax imposed upon each level of production or service that is akin to a national sales tax.  Many countries impose this type levy for goods consumed within their economies since it is more hidden and seemingly more benign than increases in income taxes.

The problem is that the VAT is a hidden and regressive tax.  Potentially assessed against each incremental level of productive activity, it harms lower income folks who largely consume their income.  It can be inflationary in that business can add incremental additional profit while prices rise to accommodate the passing through of the VAT.   More conservative folks dislike the tax because it has the ability to raise large amounts of revenue, which absent governmental spending discipline, can continue to justify spending increases beyond what might be possible with income taxes.  The additional knock is that state and local government needs sales tax revenues and the VAT is intruding upon state and local revenues.

Presumably state and local governments will be mollified by some federal revenue sharing relationship in exchange for enactment of a federal VAT.  Whatever VAT’s limitations, our view is that once combined federal, state and local income taxes rise to over fifty percent, then the electorate pushes back.  So if not a VAT, then what?