U.S. urged to adopt GST-type consumption tax

PARIS – The U.S., struggling against both joblessness and a crushing debt burden, should look past inevitable controversy and consider a Canada-style value-added tax to get itself out of its fiscal mess, the Organization for Economic Co-operation and Development said Monday.

The OECD made the recommendation in a report that said the American economy’s recovery isn’t strong enough to put all the casualties of the global economic crisis back to work.

"Previous U.S. recessions have exhibited no long-term damage to the economy or long-term increase in unemployment, but it is possible this recession will trigger these effects," said the report by the Paris-based body that analyzes economic, social and energy policies for its 33 member nations, including Canada and the U.S.

"It could be early 2013, at best, before the (unemployment) rate returns to its pre-recession level."

The report noted that one-quarter of homeowners owe more on their mortgage than the property is worth, and said consumer demand is likely to be restrained over the "next couple of years."

It also warned that despite all the restraints on the economy, the U.S. Federal Reserve Board had to be prepared to tighten monetary policy to avoid the creation of unsustainable speculative bubbles.

The OECD, which projected growth rates of 2.6 per cent in both 2010 and 2011, zeroed in on the perilous state of U.S. finances.

It noted that numerous countries, such as Canada, ran balanced budgets or surpluses during this period.

But Washington faced a tougher challenge handling the crisis because of deficits caused by George W. Bush-era tax cuts, the post-2001 surge in military and homeland security spending, and increased costs for prescription drugs for seniors.

It recommended various policy measures to improve employment prospects, such as expanded job training, while also arguing that President Barack Obama’s deficit-reduction plan – reducing the debt relative to the size of the economy to three per cent in 2015 from the current 10.5 per cent – is insufficient in the long run.

"While this is welcome, it would stabilize the debt-GDP ratio at almost twice the pre-crisis level, leaving little freedom to deal with contingencies and complicating further the long-term problem of population aging."

The report said the U.S. should reduce or eliminate distorting tax breaks and exemptions, including the scheme allowing homeowners to deduct mortgage interest payments, while broadening the tax base with a Canada-style value-added tax.

"A balance of considerations argues in favour of an eventual introduction of a VAT," the report said, noting that a value-added tax like Canada’s goods and services tax is easier to enforce, encourages individual savings, and its imposition doesn’t result in any international trade disadvantage.

The report, while not mentioning the current political crisis in B.C. over the imposition of the harmonized sales tax, acknowledged the political difficulties successive Canadian governments have had in convincing provinces to merge their sales tax regimes with the GST.

"To be sure, introduction of a VAT would not be without controversy, as was the experience elsewhere, such as in Japan and Canada when these countries introduced national consumption taxes," the OECD said.

Bush’s 2005 advisory panel on tax reform, the report said, warned of problems due to state and local sales taxes and noted "in particular the difficulties posed to some Canadian provinces following introduction" of the GST, the report said.

"Some analysts, however, have a more favourable assessment of Canada’s experience and its implications for the feasibility of a VAT in the United States."