In an interview with Charlie Rose this week, House Speaker Nancy Pelosi said that one of the the options on the table was the value added tax (VAT). Pelosi believes that the current tax system puts American industry at a significant disadvantage in the global economy and that a value added tax would help level the playing field.

Senate Budget Committee Chairman, Senator Kent Conrad of North Dakota agrees. In an interview with the Washington Post, Conrad said, “I think a VAT and a high-end income tax have got to be on the table.”

The tax would represent a major shift for the federal government toward a more European system of taxation; the value added tax is compulsory for European Union member states.  The tax is seen as a remedy to the United States’ fiscal woes.

Indeed, the value of the tax as a revenue generator is substantial. In fiscal year 2000, each 1% VAT would have generated $37.8 billion in revenue, according to a Congressional Research Service report. Leonard Burman, director of the Tax Policy Center claims that a 25% VAT could pay for health care for every American (pdf pg 14).

The VAT does have significant drawbacks. According to the Washington Post, the price for a gallon of milk would jump from $3.69 to $4.61 under the 25% VAT. The price increases would fall hardest on the poor, making many on the left wary of instituting such a regressive tax.

The White House indicated it would consider the tax but acknowledged the political realities of attempting such sweeping reforms.