ELIMINATING THE BUDGET deficit by 1991 could be a taxing job.
Despite President Reagan's opposition, lawmakers may have to push through new taxes to comply with the Gramm-Rudman mandate. Two of the most likely choices are an oil excise tax or a value-added tax (VAT), and either could have a major impact on small business.
The oil tax may be too tempting for politicians to resist: slashing $50 billion from the deficit while convincing taxpayers that they haven't forked over an extra dime. Collapsing oil prices make the charade possible. If the new tax keeps declining oil prices at pre-decline levels, then consumers presumably won't feel any pinch. Nor will Congress. "This is one that's painless from a politician's point of view," says Delos Smith, a Conference Board economist.
But small businesses would feel the pain. A price cut that the free market gives and the government takes away is a tax, after all. The burden would be borne disproportionately by regions and industries that are already suffering: the Snowbelt and companies in energy-intensive businesses, such as farming and manufacturing.
A VAT, though, hurts even politicians. Oregon Democrat Al Ullman lost his congressional seat in 1980 after championing a VAT. So this time around, it arrives with a new name, "business transfer tax." No matter. It's still a monster revenue raiser. "A 10% VAT applied to all consumption items could eliminate the deficit," says Marshall E. Blume, professor of finance at The Wharton School.
It could arrive as a national sales tax tacked on at the checkout register. But a leading proposal, advanced by Sen. William Roth (R-Del.), would tax "gross business receipts," subjecting companies to a 7% to 10% tax on the value they have added to a product.
A VAT, of course, is likely to be passed on to consumers as higher prices, which could dampen demand. In very competitive situations, companies may have to absorb some of the higher costs. "Either way could be rough on small businesses," says Abe Schneier, a tax specialist at the National Federation of Independent Business.