Revenues
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 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025– | 2025– | |
Decrease (-) in the deficit | |||||||||||||
Apply a 5 percent VAT to a broad base | 0 | -230 | -350 | -360 | -370 | -390 | -400 | -410 | -430 | -440 | -1,310 | -3,380 | |
Apply a 5 percent VAT to a narrow base | 0 | -140 | -220 | -230 | -240 | -250 | -260 | -270 | -280 | -290 | -830 | -2,180 | |
Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2026.
An offset to reflect reduced income and payroll taxes has been applied to the estimates in this table.
VAT = value-added tax.
The United States does not currently have a broad consumption-based tax at the federal level, although it does impose federal excise taxes on purchases of several types of goods and services, including gasoline, air travel, alcohol, and cigarettes. A value-added tax (VAT) is a broader type of consumption tax that is levied on the incremental increase in the value of a good or service that occurs at each stage of the supply chain until the final point of sale. For example, a manufacturer would pay a VAT on the difference between the value of the materials used to produce a good and the value of the finished good it sold to retailers; a retailer would pay a VAT on the difference between the value of goods it sold to consumers and the value of those goods when it purchased them from manufacturers.
This option consists of two alternatives that would impose a consumption tax in the form of a VAT, both of which would go into effect on January 1, 2026. The first alternative would apply a 5 percent VAT to a broad base that would include most goods and services. Certain goods and services would be excluded from the base because their value is difficult to measure. Those include the consumption of financial services without explicit fees, primary and secondary education, some other services provided by government agencies and nonprofit organizations for a small fee or no cost, and existing housing.
The second alternative would apply a 5 percent VAT to a narrower base of goods and services. In addition to the items excluded under the first alternative, this alternative would exclude certain goods and services that are considered necessary for subsistence or provide broad social benefits—specifically, new residential housing, food purchased for home consumption, health care, and postsecondary education.