GOP Shocker: Value-Added Tax Plank

WHAT IS A VAT? It's a sales tax, used mainly by the Europeans, that layers taxes on a product at each stage of manufacture and distribution, from raw materialto final sale. The nonpartisan Tax Foundation offers this example: "Take a wooden table sold at retail and a 10% VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 (10% of $50) to the government. The furniture maker sells the table to the retailer for $120, sending $7 ($120 - $50 = $70 X 10% = $7) to the government. The retailer sells the finished table to a customer for $150, sending $3 to the government ($150 - $120 = $30 X 10% = $3). The total tax paid is $15, or 10% of the final retail price."

The scheme is supposed to reduce consumption and encourage savings.

"Advocates say a VAT reduces evasion because it's harder for three entities to avoid paying a $15 tax than it is for one," says the Tax Foundation. According to data released by the IRS in January, based on 2006 data, the estimated gap between taxes actually owed and those paid is $385 billion. That's more than a third of the current $1.1 trillion budget deficit. But a VAT would have to be set so high -- 30% at the federal level, with state sales taxes then added on -- that Mitt Romney economic advisor R. Glenn Hubbard has termed it a "political nonstarter."