Paul L. Caron

Monday, March 7, 2011

Dems, GOP Reject Economists' Call for a VAT

VAT The Hill, Calls for New VAT Tax Prove Unpopular With Both Dems, GOP:

A range of economists have come to Capitol Hill to sing the praises of a value-added tax (VAT), but their song is falling on deaf ears. 

While some elected officials have pledged to keep an open mind about the VAT, many lawmakers from both parties remain far from convinced, with concerns ranging from how regressive VATs can be to the prevalence of consumption taxes elsewhere in the world. ...

At a string of congressional hearings and think-tank events over the last month or so, economists with experience at the highest levels of government — including in Republican White Houses — have showered kind words on the VAT. The tax’s efficiency, they have said, comes because it does not particularly penalize savings and makes what is subject to taxation less of an opinion, among other reasons. ...

Economists who favor introducing the VAT as part of a reform of the tax code realize it would have an uphill climb in Congress, though they continue to stress that consumption taxes are a much more resourceful way to collect revenue than taxing areas like income.

News, Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Dems, GOP Reject Economists' Call for a VAT:


It is sad hat so many responding to this posting demonstrate an immense lack of knowledge of how the VAT really works. Inaccurate statements do not contribute to the discussion. 1) with the exception of the VAT in China, VAT is NOT a tax on production. 2) VAT is NOT hidden in the price; actually every receipt produced by electronic registers in retail shops shows the VAT as a separate item. You could design a VAT as hidden as you could do with a retail sales tax, but in the vats majority of countries the VAT is visible. 3) The VAT is indeed levied at each stage of the distribution chain, but not in increments that add up at 1% or 2% per step. That is the gross receipt tax. Businesses do not pay VAT, because they receive a credit for tax paid on procurement. 4) Inventories are held free of VAT, because of the input-VAT credit. The VAT on procurement is credited against VAT collected on sales in a given tax period, regardless of whether the goods have already been resold. Moreover, capital goods etc are also relieved from VAT which is a clear advantage of the RST that we have in the US.5) A well-designed VAT will have a very high efficiency rate. New Zealand's VAT leads the pack with an efficiency of over 96%.

The above does not mean that a VAT for the US is desirable. To a large extent that is matter of political view. But there are strong arguments pro VAT as there are arguments against it. Let me just say that it is impossible to reduce federal spending to the extent that a balanced budget will be reached and the national debt will be repaid. A combination of significant spending cuts, reduction of corporate income tax, a moderately progressive personal income tax with elimination of tax subsidies, in combination with a federal VAT would be desirable in my opinion. I am a small government person too, but it is important to keep perspective of reality.

Posted by: Robert van Brederode | Mar 8, 2011 4:34:38 PM

Oh yeah, a VAT will solve all of our problems. Just like solved the financial woes of the UK...ummmm no I mean Greece...umm wait a minute.... Our problem isn't a lack of tax revenues, is the lack of will to say NO to a government doing everything under the sun.

Posted by: think4yerslf | Mar 7, 2011 7:18:17 PM

"consumption taxes are a much more resourceful way to collect revenue than taxing areas like income"

But the VAT is not really a tax on consumption -- it's a tax on production and a particularly onerous and inefficient one at that. Good ol' sales taxes at the point-of-sale are consumption taxes and vastly easier to collect.

Having to calculate the value-added at each point of production and distribution seems a foolish (and typically European) method. The current infatuation with VAT eludes me.

Posted by: Craig | Mar 7, 2011 4:55:49 PM

A VAT tax is sneaky in that each manufacturing/processing step is taxed and HIDDEN. A point of sales tax makes more sense. We need people to see and feel the pain of taxes. While the VATs look harmless - who wouldn't argue with 1 or 2% tax on each step, they add up. THey add up quickly.

Posted by: rabidfox | Mar 7, 2011 12:36:43 PM

I agree with other comenters here that I would only support a VAT if it completely replaced the income tax, including a repeal of the 16th amendment. If you pass a VAT without repealing the income tax, it is just another tax hike.

Posted by: richard40 | Mar 7, 2011 11:59:52 AM

In periods of rising inventories the VAT is not a comsumption tax ...

Posted by: Jeff | Mar 7, 2011 10:56:21 AM

Doesn't not having a vat put the US at a disadvantage in international trade? Europe and many other countries have a vat which raises the price of our exports while our lack of a vat means imports are cheaper. All this plus the high corporate tax rates do is keep the exportation of jobs train going, and that is slowly destroying the middle class and the availability of private sector jobs, including manufacturing jobs.

Posted by: swampfox999 | Mar 7, 2011 10:51:08 AM

Economists who favor introducing the VAT as part of a reform of the tax code realize it would have an uphill climb in Congress, though they continue to stress that consumption taxes are a much more resourceful way to collect revenue than taxing areas like income.

A VAT may indeed be the optimal policy--in theory. In practice, the political class has demonstrated that it is incompetent, corrupt and dishonest. Afaic the politicians will not replace income taxes with a VAT; after some initial cuts in the income tax, sooner rather than later we'd wind up with a VAT on top of something like our current income taxes.

IMO the politicians know the voters know this.

A VAT would make me start paying attention to candidates at the fringe of the current political spectrum--and beyond it.

I'm willing to discuss a VAT only after overspending has been curbed.

Control spending before changing the tax laws. Secure the borders before changing the immigration laws. What is so toxic about that?

Posted by: gs | Mar 7, 2011 10:44:11 AM

No to the "Voter Avoidance tax"!!!

Posted by: Ron Reich | Mar 7, 2011 10:33:02 AM

For all the negatives of the VAT, mostly in being hidden within the price of goods/service so that taxpayers are only vaguely aware of it, it has one significant benefit, it makes everyone pay taxes, even the criminals, illicit drug barons, as well as under-the-table restaurant owners and construction tradesmen, a hitherto untapped several hundred billion dollars annually. These 'off the books' types gladly pay up to 8 or 10 % state sales taxes on their luxury cars, boats, other larger purchases, etc, but are able to ignore federal taxes, making an even greater mockery of our tax laws.

Posted by: Leo DeAngelis | Mar 7, 2011 10:23:53 AM

i am an anti tax small government guy, but it seems to me we need a broad based tax; otherwise, there will be constant pressure to "tax the rich" because everyone thinks the rich is someone else. so we do need, as part of a comprehensive reform, some kind of broad based tax. do we not?

Posted by: tom | Mar 7, 2011 10:22:41 AM

The only problem the government has is too much spending for not enough taxing. Solution: spend less or have enough courage to raise taxes and face the consequences.

VAT tax is, yet another, stealth tax designed explicitly to con the public by keeping the fund appropriation out of sight and out of mind. The only reason for existence at all is to serve gutless and corrupt politicians.

Posted by: K | Mar 7, 2011 10:22:12 AM

I'm willing to consider supporting a VAT ... as long as it includes a repeal of the 16th amendment.

Otherwise, it will not REPLACE the income tax - it will be IN ADDITION to the income tax.

Posted by: Marshall | Mar 7, 2011 10:11:51 AM

"they continue to stress that consumption taxes are a much more resourceful way to collect revenue than taxing areas like income"


Let me translate that for you: "Sneakier."

Posted by: Barbara Skolaut | Mar 7, 2011 9:52:44 AM

Maybe we could make some headway in reducing gummint spending by calling it what it is: The Value Subtracted Tax.

Posted by: Buck O'Fama | Mar 7, 2011 9:51:11 AM

We already have VAT. They're utility, fuel, phone, cable etc. taxes. Then there are the alleged "luxury taxes" on non-essential goods and services, real estate transfers, capital gains and whatever else you can name. Maybe that's why Washington is cool to VAT, and maybe why they should just rename all those taxes as VAT and get it over with.

Posted by: Gary from Jersey | Mar 7, 2011 9:47:53 AM

This could only work if the federal, state and local income tax is repealed along with the employee portion of the payroll tax. How high would the VAT have to be to replace the various income taxes and the payroll tax remains to be determined but I would guess it would be somewhere at the 25% level and probably would have to require that all presently non-taxable (sales) items and services become taxable. If nothing else such a scheme where the payer sees the amount of tax on every purchase would be a powerful inducement to reducing the size of state, local and federal government.

Posted by: cubanbob | Mar 7, 2011 9:36:52 AM

Our current income tax is way too inefficient to raise the kind of money it will take to make a dent in our debt.

Posted by: concerned economist | Mar 7, 2011 9:33:51 AM

I hope that you find space for Japer Cummings article in todays Tax Notes.

Posted by: Ed D | Mar 7, 2011 9:31:43 AM