The President's deficit reduction panel will likely recommend a national value-added tax (VAT), such as most of the other developed nations have, at the end of this year. This tax, if it becomes law, will come on top of all the existing taxes we pay now. We writers had better watch what happens in 2011 after the panel makes this recommendation and Congress starts to consider it.

If you want to get an idea of how a VAT might actually work in the U.S. and how it might affect the economy, just google on the phrase “value-added tax.” That’ll keep you busy for a few hours.

The most obvious consequence of a new VAT will be an overnight increase in the price of nearly everything, equal to the percentage of the VAT. For starters in this country, 10 percent would constitute a good guess. In some European countries it exceeds 20 percent. But it could in effect go much further than that for people in certain occupations, book authors among them. I derive all of my income from book royalties, so I'm especially sensitive to this issue.

The VAT, if carelessly written into law by Congress or inappropriately administered by publishers, could devastate the livelihoods of writers who live mostly or entirely off of book royalties. All book authors will, in any event, find their royalties treated as the proceeds of a "sale" and subject to the full force of the VAT, which ordinary businesses treat as a sales tax. Many, if not all, authors will have to "VAT-register" with the federal government and pay the tax on royalties, in addition to income taxes and other taxes.

An ordinary business will pay the VAT to the government on the "value added" as a result of their work or production, and then pass the tax along to the buyer. As writers, we should be able to pass this cost along to the publishers, who, in effect, constitute our buyers. But we had better not take this pass-through process for granted. We had better make sure that publishers reimburse us for the VAT that we pay to the government.

I had direct experience with what can happen with this sort of tax, if not properly administered, when I lived in Hawaii. Hawaii has a 4 percent general excise tax (GET) which resembles a VAT. I had to pay GET on all of my income -- gross income, not net -- so it was, in effect, a 4 percent pay cut. I did not try to convince my New York-based publisher to reimburse me for it. (The fact that I basked in 80-degree sunshine while they shoveled snow would likely have done little to make them appreciate my pain.)

In light of growing talk about a VAT in the United States -- which one can hardly miss if one scrutinizes the various economics-related Web sites regularly -- I recently queried the Cambridge University Press (England) about this matter. They routinely deal with the VAT in conjunction with author royalties. They were kind enough to explain how it works over there. Publishers add the VAT to royalty payments. So, for example, if a royalty payment amounts to $10,000 and the VAT equals 10 percent, the author will get $11,000. However, the author must remit the $1,000 VAT back to the government. It’s as if the publisher has paid a sales tax to the author in return for the purchase of the author’s work; the author is treated as a producer of goods. So, at least in England, authors do not actually take a pay cut as a result of the VAT.

But, as the eternal troubleshooter, and after the "Hawaii experience," I can't get out of my mind the potential danger here: We, as authors, will have to ensure that American publishers reimburse us for the amount of the VAT on the royalties we receive from them. Otherwise, the tax will strike with full force at our gross income. We should not have trouble convincing publishers to reimburse us, because they’ll have nothing to lose for so doing; they'll end up paying out the same total amount of VAT whether they reimburse us for our share or not. If publishers do not pay the VAT on royalties to us, then presumably they will (if they remain honest with the government) not be able deduct the royalty payouts from their receipts in regards to their own VAT payments to the government.

Our main concern need not lie with the government on this issue, except to the extent that, if any one of you opposes the VAT, you had better write to your legislators and express your sentiments straight away. If a VAT appears likely to pass into law, we authors should try to convince our Congress to exempt intellectual property from VAT altogether (as they do in mainland China, if I’ve done my homework right) while they craft the bill. When a VAT becomes the "law of the land" -- and I believe that it will -- then we must focus our attention on our business relations with publishers. It won't hurt to stay on good terms with them starting right now!