Recently Speaker of the House Nancy Pelosi indicated that the country needs a value added tax in addition to the current income tax to help pay for healthcare reform. A 5 % value added tax has been suggested.

You will probably hear many people explain that value added tax is just like a state and local sales tax on products. Well, this is only part of the story. A value added tax is a tax that occurs at each level of a transaction and will include a tax on services. A value added tax is a consumption tax, the more you purchase the more taxes you pay. American youth will be hit the most with a value added tax. They have yet to purchase hard goods that last a long time (furniture, refrigerators, dishwashers, televisions, clothes washers & dryers, and etc.).

The cost of any product will escalate with each transaction. With each new seller the purchaser will pay the cost of the product, sellers profit, and the value added tax. In theory only the end consumer will pay the added value tax. Because the other sellers will have certificates indicating the purchaser is not the end-user. However, spoilage/damaged products along the sale route will cause a normal pass through purchaser-seller to become an end-user.

After an initial high increase in federal revenues, revenues will start declining as the affect of lower cost for imports eliminate American competition. Also, Americans will reduce their purchases and major household goods will be kept longer.

In countries that have an added value tax, underground transactions are common for services; better know in America as “under the table” sales.

Will we see an American Value Added Tax? It is probably to early to speculate.