May 3, 2010


Much to Love, and Hate, in a VAT (N. GREGORY MANKIW, 4/30/10, NY Times)

[C]onservatives have long argued that the American tax system is grossly inefficient and impedes the economy’s ability to reach its full potential. They contend that taxing consumption is better than taxing income, and a value-added tax does exactly that.

Moreover, a VAT is the twin of the flat tax that conservatives sometimes advocate. To see why, imagine that we started with a VAT. Then we add a wrinkle: We allow businesses to deduct wages, in addition to the cost of goods and services. We also require households to pay a tax on their wage income.

Other than shifting the responsibility for the tax on wages from the business to the household, it might seem that we haven’t done anything significant. Indeed, we haven’t. But the new tax system would no longer be a VAT. It would be the flat tax that Robert E. Hall and Alvin Rabushka first proposed back in 1981.

So why, if these two tax systems are really the same, are conservatives attracted to the flat tax and repelled by the VAT? It is because the flat tax is usually proposed as a substitute for our current tax system, whereas the VAT is often suggested as an addition to it.

Posted by Orrin Judd at May 3, 2010 4:03 PM
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