Paul L. Caron

Wednesday, February 28, 2024

Mehrotra Presents The Rise And Fall Of The 1970s National Value-Added Tax To Fund Education Today At Toronto

Ajay K. Mehrotra (Northwestern; Google Scholar) presents Nixon’s VAT: Lawyers, Economists, and the Rise and Fall of the 1970s National Value-Added Tax to Fund Education at Tornoto today as part of its James Hausman Tax Law and Policy Workshop hosted by Ben Alarie:

Ajay mehrotraConclusion
It is well-known by now that income and wealth inequalities have been soaring for the past half-century across the globe. Although some developing countries have seen a decrease in poverty and a rising middle class during that period, much of the world has experienced dramatic increases in within-country economic disparities. In the United States, the growing concentration of wealth has been particularly pronounced, especially at the top end of the socioeconomic spectrum. While the details of this increase have been debated recently by experts, most agree that both income and wealth inequality have increased significantly.

One prominent obstacle to addressing U.S. inequality has been the fractured nature of the modern American fiscal and social welfare state. The combination of a highly salient federal system of direct and progressive taxation and a more shrouded social welfare state has led to a unique type of political cognitive dissonance that, in turn, has helped perpetuate the myth of the “overtaxed” American—a myth that has been exploited by anti-statist politicians and lawmakers for decades.

This fable has, in part, prevented the United States from joining the rest of the developed world in adopting a comprehensive national consumption tax such as a VAT. Whereas most other affluent nation-states have a VAT that underwrites robust social spending, the United States remains an outlier in terms of both its fiscal and its social policies. As a result, the United States is constrained in its ability to generate the large-scale revenues necessary to fund robust social welfare programs and thus address inequality. Dispelling the myth of the “overtaxed” American might be the first step toward a profound restructuring of American fiscal policy—a restructuring that could include a U.S. VAT to fund new social spending and expand existing anti-poverty efforts.

Many of the existing VATs in the developed world gradually emerged from other cruder forms of consumption taxes that were adopted earlier in the twentieth century. On several occasions throughout the twentieth century, the United States had its opportunities to experiment with similar rudimentary, broad-based consumption taxes. In fact, there were at least three pivotal periods of historical contingency when the United States could have adopted a comprehensive federal consumption tax but chose not to.

This Essay has begun the process of examining why there is no U.S. VAT by identifying three critical junctures in the path-dependent process of fiscal policymaking. By focusing mainly on the first period of the early 1920s, this Essay has shown how the political, economic, and social conditions of the post-World War I period provided the backdrop to the ideas of one prominent tax expert who became the intellectual progenitor of the VAT. As a pragmatist and political realist, Thomas S. Adams anticipated that his proto-VAT would have little chance of adoption. It was, as he predicted, doomed to failure.

Still, there were lessons to be learned from failure—lessons, as Adams noted, about the “the great political and social forces which control the evolution of tax systems.”178 Similar lessons might be drawn from the other historical periods—those moments of similar national crises—when the plasticity of U.S. fiscal policymaking could have permitted national experimentation with a comprehensive federal consumption tax. Future research on the broad forces, seminal events, and key historical agents in each of these unsuccessful attempts will likely shed further light on the critical question: why no U.S. VAT?

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