ENCOURAGING PEOPLE TO SAVE THEIR INCOME RATHER THAN CONSUME IT...:

U.S. Weighs Tax That Has VAT of Political Trouble (JOHN D. MCKINNON, 7/12/10, WSJ)

[A]ccording to some economists, a VAT can produce all that revenue without discouraging investment as higher income taxes would.

"If you're looking for more revenue, I think raising rates under the current income tax probably is not a good idea and could do significant economic harm," says Eric Toder, a co-director of the nonpartisan Tax Policy Center think tank. By contrast, a VAT "doesn't interfere with where goods are produced...and doesn't interfere with savings, investment and capital formation."

A White House spokeswoman said President Barack Obama "has not proposed this idea nor is it under consideration."

Second, many U.S. multinationals increasingly suspect they might have little choice but to accept a VAT, or some similar tax, if they hope to avoid further increases in U.S. corporate income taxes, or even win cuts in current rates. They regard current corporate taxes as too high, particularly given global trends toward reducing them. Some companies are hoping a VAT would encourage Congress to streamline and lower the corporate tax, something they regard as critical given international trends.

Third, even a few domestic businesses are beginning to eye the VAT as a possibility, despite the considerable administrative burden it creates. That's largely because value-added taxes are imposed on imports at the border, and refunded to domestic businesses on their exports, making a VAT an effective subsidy for U.S. producers, according to the advocates. (Some experts disagree.)

Still, there are many reasons why the VAT remains a heavy lift in Washington: As a consumption tax, the VAT hits lower-income earners disproportionately, because they spend more of their income. Fixing that problem probably requires offsetting the VAT with some kind of credit for the poor.

...is a considerable portion of the attraction.

Posted by Orrin Judd at July 12, 2010 6:06 AM