Why a VAT Tax is Coming

FORTUNE -- Last Saturday, I got a crackling cell phone call from Republican Congressman Paul Ryan, who was hanging drywall at his Victorian home in Janesville, Wisconsin. I'd found that Ryan had knack for foreseeing unpredictable twists in economic legislation and wanted to chat with him about what he's seeing now.

Last winter, when most experts reckoned that Scott Brown's election in Massachusetts spelled the demise of the Obama healthcare bill, Ryan -- who's intimately familiar with arcane congressional rules as the ranking Republican on the House Budget Committee -- told me that those rules left the Democrats plenty of room to pass the bill. He was contrarian, and he was right.

Right now, the VAT appears so radical that it's gained little support in Congress and isn't even endorsed by the Obama administration. But Ryan told me that a VAT is far more likely than most Americans imagine. The reason isn't the one that many experts are forecasting -- that the Fiscal Commission appointed by President Obama will recommend the controversial levy. "I don't believe the Commission will advocate a VAT," Ryan told me, adding that he doesn't speak for his fellow members.

On the contrary, Ryan fears another path to the VAT. "It cannot pass without a fiscal crisis," he warns. "Our leaders are now courting one with big spending and by adding new entitlements. They know in the back of their minds that if a fiscal crisis comes, they can throw a VAT on top of that."

Ryan concluded by saying that the economy now faces two layers of uncertainty -- the threat of a debt debacle that's already well known, and the added danger that the solution will be the heretofore unimaginable and largely unforeseen: a VAT.

It's important to understand that a VAT looms so large because it's the only tax that can remotely raise enough revenue to close the immense gap between federal spending and receipts -- in the absence of epic and unpopular reductions in expenditures. The VAT resembles a national sales tax -- the main difference is that producers make the actual payments to the government as they add components to computers or autos along the line of production. But it's consumers who effectively reimburse those producers by absorbing the full tax when they purchase the PC or minivan.