Impose a 5 Percent Value-Added Tax

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues  
  Apply a 5 percent VAT to a broad base 0 200 290 300 320 320 330 340 360 370 1,110 2,830
  Phase in a 5 percent VAT to apply to the same broad base 0 40 100 160 230 290 330 340 360 370 530 2,220
  Apply a 5 percent VAT to a narrow base 0 120 190 200 200 210 210 220 230 240 710 1,820

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2022.
An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.

A value-added tax (VAT) is a type of consumption tax that is levied on the incremental increase in value of a good or service at each stage of the supply chain, up until the final point of sale. Currently, the United States does not have a broad consumption-based tax. Most states impose sales taxes, but, unlike a VAT, those are only levied at the final point of sale.

This option consists of three alternatives. The first alternative would impose a 5 percent VAT on a broad base of goods and services that would become fully effective in January 2022. Certain goods and services would be excluded from the base because their value is difficult to measure. Those include financial services without explicit fees, existing housing services, primary and secondary education, and other services provided by government agencies and nonprofit organizations for a small fee or at no cost. Government-reimbursed expenditures for health care—primarily costs paid by Medicare and Medicaid—would also be excluded from the tax base. The second alternative would gradually introduce a 5 percent VAT to the same broad base of goods and services. The VAT would be phased in over five years, starting at 1 percent in 2022 and increasing by 1 percentage point each year. The third alternative would impose a 5 percent VAT on a narrower base and would, like the first alternative, become fully effective in January 2022. In addition to those items excluded under the broad base, the narrow base would exclude certain goods and services that are considered necessary for subsistence or that provide broad social benefits—specifically, new residential housing, food purchased for home consumption, health care, and postsecondary education.