Tuesday, March 29, 2011
Revenues from a VAT could be used to reduce the corporate rate. Table 3 shows the VAT rates required for different levels of rate reduction. A reduction in the corporate rate from 35%to 20% could be financed with a VAT with a rate between 2.6 and 4.5%, depending on how much special relief is provided.
Reducing or even eliminating the corporate tax and replacing the lost revenues with a VAT has always been a good idea for competitiveness reasons. The United States would be substituting revenues from its least economically efficient tax with a highly efficient consumption tax. ...
For decades, the conventional political wisdom has been that a VAT will never be enacted in the United States because liberals view it as a tax targeting the poor and conservatives view it as a money machine. And in response, pundits would quip that a VAT will be enacted when liberals view it as a money machine and conservatives view it as a tax on the poor.
It's time to jettison that type of talk. What passed for healthy skepticism in the 1990s is no longer useful or particularly relevant. Unlike in previous episodes when the federal deficit was front-page news -- as in 1982-1984 (debt-to-GDP ratio at about 25%) or 1990-1993 (debt-to-GDP ratio at about 45%) -- now we truly are playing with the possibility of the collapse of federal finances (debt-to-GDP ratio surpassing 80% in 2015, and growing). Until somebody can guarantee that our fiscal problems are under control, either because spending cuts are politically feasible or because concerns about the economic fallout from rising debt are overblown, it is prudent to give a VAT a prominent role in the debate about deficit reduction.
Moreover, as globalization increases demand for a more competitive tax system, the United States must consider shifting from a system that relies primarily on income taxation to one that relies primarily on consumption taxation. Most other major economies around the world depend more heavily on consumption taxation than does the United States. And by all indications, reliance on consumption taxes is increasing.
Finally, the traditional liberal and conservative arguments against consumption taxation are hardly insurmountable. True, VATs are generally more regressive than income taxes, but the differences are usually overstated (because government analyses equate well-being with annual income as opposed to lifetime income, a superior measure). But more importantly, however one evaluates fairness, any regressive effects of a VAT can be offset by changes elsewhere in the tax system or in the provision of government support and services. For example, Prof. Leonard Burman of Syracuse University has proposed using a VAT to pay for expansion of healthcare to the poor (A Blueprint for Tax Reform and Health Reform) ...
As for conservatives who make the money-machine argument, they are nothing more than fiscal luddites. Their wish to drastically reduce government spending must be separated from the issue of how the revenue is raised. The VAT is a modern and efficient method of raising revenue, as any conservative economist will privately tell you. Consumption taxation is the revenue raiser most conducive to international competitiveness. Insisting on that indirect method of limiting government spending comes at a huge cost to the economy.
If there is a movement to reduce traffic deaths, we do not tell automakers to make smaller and less powerful engines. We seek better roads, safer cars, and improved driving skills. Similarly, if there is a movement to reduce government spending, we should not make the revenue engine less efficient. We should put caps on government spending and make arguments against programs on a case-by-case basis.
Conservatives repeatedly express their fear that an efficient revenue generator will only make it easier for politicians to finance big government. That is a possibility, but hardly an iron law. It's hard to believe that if a VAT were in place, the politics of raising revenue would be any easier than now. ...
In summary, if conservatives can sufficiently cut government spending and if they are willing to remain dependent on income taxation, they are correct to shun a VAT. But they haven't proposed the necessary cuts. And if anything, their efforts to promote competitiveness through the tax system suggest less, not more, income taxation.
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