Who's scared of a Value Added Tax?

There's a lot of chatter about the U.S. adding a Value Added Tax (VAT) to solve its looming fiscal crisis.  The Feds need to tax more and spend less to bridge the trillion dollar annual deficits, right?  Here's Bob Carroll and Alan Viard in TaxNotes:

Recommendations that a VAT be considered have been more common than outright endorsements of the tax. The idea surfaced briefly as a possible source of revenue for healthcare reform.6 House Speaker Nancy Pelosi, D-Calif., recently commented that ‘‘it’s fair to look at’’ a VAT, and Senate taxwriter and Budget Committee Chair Kent Conrad, D-N.D., has said that a VAT should be on the table in future tax policy discussions.7 Two former Federal Reserve chairs have made similar statements: Paul Volcker has referred to a VAT as a ‘‘possible approach,’’ and Alan Greenspan has said that it must be considered as a possible way to reduce the deficit.8

The fact is the U.S. is the only advanced economy that doesn't have a VAT. Americans have no appetite for adding another tax.  But they might just be willing to trade for one. So which tax would the pro-VAT crowd be willing to give up?  Corporate is probably the leading candidate, because it raises far less revenue than other major taxes, it is sensitive to recessions (generating half as much during busts as booms), and because it is really bad for growth.

CBO lists these major revenue sources for the federal government in FY 2009:

• $915 billion ... Individual Income Taxes
• $891 billion ... Social Insurance Taxes
• $138 billion ... Corporate Income Taxes
•  $62 billion ... Excise
•  $23 billion ... Estate and Gift

Based on this paper (HT Marginalrevolution.com), a VAT raises revenue at under half its rate in GDP terms, meaning that a 10 percent VAT historically brings in around 4 percent of GDP in revenue.  Since corporate income taxes raise 1-2 percent of GDP in the U.S., then a revenue neutral VAT replacement would, I think, be roughly a 4 percent tax on consumption. 

But why stop there?  Conservatives (and some liberals) hate the estate tax.  Offer to eliminate it along with the corporate income tax in exchange for a VAT of 5 percent, and everybody's happy.  Right?

But why stop there?  If a grand tax bargain is in the works, why not put a serious gas tax on the table?  Jim Hamilton tells us that the U.S. consumes 12 billion gallons of gasoline in a typical month.  That's a Gross Billion a year (144 for math geeks). A one dollar gas tax would (ceteris paribus) yield $144 billion a year.  Make it six bucks a gallon, and you could kill the form 1040 forever.  I like it.  In fact, I like this little fantasy a lot better than doing my taxes tonight ...

Comments

[Marcika]

Some problems with your analysis:

1. The corporate tax take is unnaturally low in 2009. (Remember the Great Recession of 2008?) In a normal year it would bring in something closer to 350bn.

2. Putting a $6/gn tax on gas would probably halve gas consumption within a few years (to European levels). While this is a great and desired outcome, it will also halve the tax take, so you can't eliminate income taxes.

3. Replacing estate taxes for the super-rich with VAT that hits poor people disproportionately won't be a popular proposal for anybody except the super-rich. (I.e. Republicans and their backers might like it, but Dems won't.)

[Andy]

To replace the estate tax would take a VAT of 0.4% so no one would even notice...

[Dan Weber]

It seems that the VAT is a good replacement for employment taxes. About as regressive, but it doesn't penalize work.

It means we have to get rid of Social Security's association of what you pay in to what you get out, but that's probably doomed anyway.

[Tim Kane]

Dan is right. The new payroll tax of 3.8% on investment income severs the philosophical (if fictional) link between your work and your social insurance. It's long been understood as a payroll tax, not a mandatory savings. So, might as well trade the payroll tax for a VAT. Another plus would be the incentives for seniors to work more (especially me!)

[Richard Stump]

The problem is the dems are not suggesting trading the VAT for another tax, They are talking about just adding it. Since it increase the cost of goods and services at each point in the chain, you have to consider how much it might decrease demand and therefore lower its efficiency

[Lev Lafayette]

Oh great. Another advocacy for another transaction tax. Which, like all transaction taxes, has a deadweight loss on trade and whose costs is split between producer and consumer.

Want a tax reform that encourages, rather than reduces productivity? Want a tax reform which encourages careful use of resources rather than wasting them? That has no deadweight loss? That

That has been supported, over and over again from every economist from Adam Smith, to David Ricardo, to J.K. Galbraith, to Herbert Simon, William Vickery and more?

Land Value Taxation. Learn about it.
http://en.wikipedia.org/wiki/Land_Value_Tax

[John]

The VAT is just another way to support more government spending at the expense of tax payers. The working poor would most be affected by the VAT.

How aobut ending these silly tax games and institute a simple flat tax.

[CDG]

No corporation pays any taxes, they simply collect tax. All companies deduct expenses, including taxes when calculating earnings. If taxes go up, that is part of the cost structure and it goes into the cost of goods and services when pricing is determined and budgets are created. It always amazes me to see people want to "soak the rich" when it always is deflected back to them in hidden form. Corporate Tax is already a value added tax, and a VAT would simply be more visible.

[Fair taxes]

A VAT is just sales tax levied at the wholesale level. It's only advantage over sales tax is that businesses in the chain of distribution have an incentive to enforce it. Beyond that it is just as regressive as any others sales tax, a greater burden the poorer the individual. It is a flat tax.

Estate taxes are for more than raising money, the idea is to break up financial dynasties a little each generation so the country isn't perpetually owned, influenced and operated by an aristocracy of trust-fund heirs. The current levels are more than generous to heirs, making most multi-millionaires for estates that exceed the combined wealth of their parents. The heirs stand to receive $7 million tax free from the estate, then 'only' about half of what is in excess of that. It is a great way to tax and should be indexed for inflation and kept permanent a tax.

[Bob Hay]

We should develop tax policies that encourage domestic employment and help to reverse the trade deficit. The VAT is a great way to accomplish this since it is the only tax that is applied equally to domestically-produced and imported goods. If we were to use the VAT revenue to replace the corporate income tax we could reduce the motivation of companies to outsource work offshore. Using the VAT revenues to subsidize corporate domestic healthcare expenses would further reduce offshore motivation and increase small business healthcare coverage. Applying a lower VAT rate for essential food products and a higher rate for fuel would help to make the tax less regressive and stimulate more responsible vehicle acquisition.

[Landon]

As a student currently studying Economics, I have to agree with most of the comment by Lev Lafayette above. However, many if not most Americans do not own land which is anything to gather tax from; renters make up a significant portion as well. A VAT is simply not what America needs to get us out of a recession. Any tax reduces motion in the economy. Futhermore, the Democrats are so audacious as to want to add this tax without taking away another, as the author shows may be worth considering.

What I think we could really benefit from is a high national sales tax with no federal (or even state, for that matter) income tax, i.e. the FairTax (http://www.fairtax.org/).

[Orphe D]

13 Senators, 12 Democrats and 1 Republican wage a war on the American middle class! http://wp.me/pPdcm-2r

[Pat]

Landon, Most Americans do own land, if you own a house, that house is placed on a plot of land

[Bob Bogus]

The majority of Amerikans are like little Timmy Kane: brain dead sheeple who think their government loves them.

The majority of AmeroCons will gladly pay a VAT and an algore carbon tax.

[Bob Bogus]

Yer right, little Timmy Kane.

Our government masters MUST steal even more money from us.

After all, our rulers have more of their banksters buddies to bail out and more brown people to kill half a world a way.

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