Editor's note: This column by former U.S. Rep. Sam M. Gibbons of Tampa has been adapted from a letter he sent to the National Commission on Fiscal Responsibility and Reform, a bipartisan panel appointed by President Barack Obama to address the nation's mid- and long-term fiscal challenges.
A temporary federal debt reduction value-added tax would be the most efficient and fair means to reduce the national debt. • During 34 years in Congress, I served on the Ways & Means Committee of the House of Representatives for 28 years, including as chairman of the committee. I served on the House Budget Committee for four years, and I worked with eight presidents on tax, trade, health care and Social Security. As chairman of the trade subcommittee in Congress, I traveled around the world to study value-added tax systems used by all the leading industrialized countries. As a result, I have gained a unique perspective on the successes and failures of federal fiscal policies over the last half-century.
The Department of the Treasury says the national debt owed by the public is $8.7 trillion, which amounts to 62 percent of the nation's gross domestic product. The Congressional Budget Office says this debt is projected to increase to 87 percent of GDP by 2020, 109 percent of GDP by 2025, and 185 percent of GDP by 2035. Clearly, the federal government must act now to prevent financial calamity in the future.
I recommend to the president, the Congress and the National Commission on Fiscal Responsibility and Reform this short-term solution that I have given much thought and research over the past 20 years. I believe we share the same objectives with any serious recommendation: real deficit reduction, fairness, job creation, simplicity, advancing our international competitiveness and getting our economy moving again. My federal deficit reduction recommendation goes only to the reduction of the national debt.
This temporary value-added tax rate would be set by economic conditions by law, which would provide flexibility but surety to the repayment of the debt. This is the simplest form of a value-added tax. It complies with all of the world's agreements on international trade. Briefly stated, it is a simple subtraction method system, collected by businesses and paid upon the consumption of goods and services. Most of the industrialized countries already employ this tax system. The tax rate could be quite low if there are no special exceptions or exemptions. But the rate could be determined by law and changed by law as conditions warrant.
There is a simple tax form that could be used to collect the tax. As in the case of all taxes, the tax is paid by the consumer but businesses would collect the tax and remit it. The payment, record keeping and auditing is extremely simple.
To promote simplicity, transparency and fairness, there would be no special exceptions or exemptions. Burden adjustment would be made outside this act, and any rebate calculation easily could be done through minor changes in existing law and by the Internal Revenue Service. The goal would be to keep the adjustment mechanism as simple as possible and to minimize the number of Americans who would be subject to it.
The paper on which this letter is written provides an example of how the proposal would work. The tax would be imposed on the net profit when the timber is sold to the paper manufacturer. The tax would then be collected on the paper manufacture (net all expenses). When the finished paper is sold to the consumer, the VAT tax would also be collected based on the net profits of the retail business. If the paper manufacturer exports the paper, then all of these taxes would be fully rebated to the business. And if the paper is imported a VAT would be collected when sold in this country. Because the tax is only collected by businesses, it would not be collected upon personal transactions like the sale of an owner-occupied private residence. Personal savings would not be subject to the tax.
The amount of the value added by any business during any period would be computed under the subtraction method. The business would total its gross receipts from business activities for the period and then subtract the amount (referred to as "business purchases") paid by the business for products and services to be used or sold in the business activity. Business purchases do not include employee compensation. If the amount paid for businesses during any collectable period exceeds the business gross receipts for that collectable period, the business would be entitled to a refund equal to the new tax rate times that excess.
There are rules for goods and services furnished by governmental entities and tax-exempt organizations. Financial intermediation services for example, of businesses such as banks and insurance companies would be included in the tax just like other services. Their gross sales of services would be limited to the "spread" between the sum of interest, premiums, and investment income received (from borrowers, insureds, and investments) and the sum of interest and claims paid (to depositors and insureds), plus identifiable fees for specific services and other sales receipts. Sales to nonprofit entities would be included in the tax.
The key is to have all consumers share equally in the responsibility of paying off the debt. Everyone has in one way or another benefited from the years of deficit spending, and everyone should equally step up to the plate and play by the same rules. If there are no exemptions and carve outs for special interests, the American public will be much more inclined to support this program to stand together and collectively reduce our country's structural deficits.
Our structural deficits are completely unsustainable and pose a true national security challenge. To continue to play an effective leadership role in the world it is imperative that we rebuild our economic strength at home. The time has come to stop the finger pointing as to who did what to cause these structural deficits. The only requirement now is to bring together the national leadership and the tough political will to resolve to eliminate these structural deficits before they eat us alive.
My proposed deficit reduction plan will work. It is simple, fair, tested and easy to implement. Moreover, it is easy to adjust the rate and easy to terminate when we get the job done for our country and many future generations of Americans. History will look back on what we must do here, and we will really be remembered as the greatest generation.
I look forward to presenting this proposal to the commission when it receives public comments. I look forward to working with many on the commission whom I know well, to have a civil and honest debate about what we all know needs to be done to make our nation a leading example of personal responsibility and democracy that works.
Sam M. Gibbons served as a member of the U.S. House from Tampa from 1962 to 1997.