No two ways about it. The government is drowning in deficits, and hardly anyone is willing to endorse a boost in income taxes to raise revenue.
So what's the solution?
For an increasing number of conservatives and liberals alike, the crisis calls for a tax on consumption, specifically a type of national sales levy long prevalent in Europe that is known as a value-added tax, or VAT.
"It may be a cliche, but this is an idea whose time has come," said A. Gary Shilling, an economist based in New York. "We could see serious consideration given to a VAT in the next Congress."
The VAT is collected on goods and services at each stage of the business process, from raw materials to manufacture to sale. At each phase, the tax is levied on the value added to the product. Ultimately, though, the consumer foots the heaviest tax bill and faces the prospect of higher prices as producers pass their costs along.
"It does tend to increase prices and hence is inflationary," Shilling said. "Any tax is. Taxes get passed on ultimately, but this one is very direct. It hits, bang, right today."
"The effect of the tax will be to raise prices," agreed Greg Ballentine, national director for tax analysis in the Washington office of Peat Marwick Main & Co., a major accounting firm. "In common sense terms, the VAT is a very cumbersome way of getting to what is, in effect, consumers paying a 10% tax."
That does not sit well with the nation's merchants.
"Retailers over the years have been opposed to the concept of a VAT," said Lee Williams, senior vice president and legislative counsel of the American Retail Federation, a Washington trade group. "We are sellers of goods and as such object to any tax that would stifle consumption."
The bad news for consumers could be compounded, too. Observers fear that retailers would base their markups on the wholesale price plus the VAT. In other words, if a $100 item at wholesale with a 10% VAT were given a 100% markup--not unusual in retailing--the consumer would then pay $220, a full $10 more than if the VAT were simply tacked on to the marked-up price. (The VAT is included in the price the customer sees on a tag.)
However, in the view of many business lobbyists and government officials, a national tax on consumption would not only raise much needed revenue but would also induce Americans to save more. They note that the nation's savings rate has fallen to historically low levels as consumers have powered the economy in recent years with heavy spending. A higher rate of savings, they say, would boost the supply of investment capital for businesses for upgrading facilities.
Nearly everyone agrees that such a tax, which would raise an estimated $20 billion for each percentage point imposed, would quickly go a long way toward reducing the deficit. In fact, some conservatives say it might work too well.
"It raises a lot of money relatively painlessly, and we need the money," said Charles E. McLure of the Hoover Institution, a conservative think tank affiliated with Stanford University. "The reason to dislike it is the so-called money-machine argument."
That theory holds that a VAT would create a larger federal government, with more spending flowing through Washington, to the detriment of the states, said McLure, author of "The Value-Added Tax: Key to Deficit Reduction?" published last year by the American Enterprise Institute, a business-oriented research group in Washington. But even that scenario, McLure said, is preferable to a continuation of hefty deficits.
Others, however, contend that a VAT would be regressive, putting a disproportionate amount of the burden on those who can least afford it.
"The big problem is that it's tough on the poor and middle-income (consumers) and easy on the rich," said Robert S. McIntyre, director of Citizens for Tax Justice in Washington.
In a 1984 study, the Treasury Department suggested that such an effect could be eased by providing a refundable income tax credit to lower-income individuals.
John H. Makin, director of fiscal policy studies of the American Enterprise Institute, sees that as preferable to a system of excluding certain items from the VAT. "The European experience with exclusions is that it's an administrative nightmare," he said.
France, for example, has six different rates of VAT, with much higher rates imposed on luxury items. The differences cause complications when it comes to deciding at what rate a particular item should be taxed. For instance, are sugar-coated peanuts a candy or a vegetable? Is Head & Shoulders shampoo a medicine or a cosmetic?
Why, then, has the VAT become so prevalent in Europe? In Ballentine's view, it is because the VAT simplified an even more cumbersome system that had existed for years. Under that system, known as a cascade tax, levies were imposed at various levels of production but no one got credit for taxes paid at previous stages.