April 16, 2010


You want tax reform, America? Try the VAT.: Americans might be persuaded to accept a VAT, or value added tax, if tax reform meant they could eliminate corporate and estate taxes. (Tim Kane, April 15, 2010, CS Monitor)

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?

...except "insurance" taxes and redirect those to personal accounts.

Posted by Orrin Judd at April 16, 2010 5:57 AM
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