IT NEEDS TO REPLACE THE TAX ON INCOME, NOT SUPPLEMENT IT:

Value-Added Tax Lessons from Canada: The sales tax has helped cut corporate tax rates. But the nonprogressive VAT is transparent, and a political liability (Theophilos Argitis, 4/07/11, Business Week)

Since the GST was rolled out, most Canadian provinces have followed suit with their own VATs. Ontario, Canada's most populous province, adopted one last year. Today, 85 percent of Canadians pay both federal and provincial VATs. Says Smart: "The Canadian evidence is that it works."

If the U.S. were to consider adopting a VAT, lawmakers would need to assure voters of two things in order to overcome opposition: that the tax is revenue neutral, and that it won't hurt the poor. Len Farber, former director of tax policy at Canada's Finance Dept., recalls that the federal government mollified the public by cutting personal and corporate tax rates before introducing the GST. "It was hard enough to convince the population at the time that this was a revenue-neutral tax," Farber says. "If personal tax rates and corporate tax rates had not gone down, they never would have believed it."

In Canada, lower-income families receive quarterly refunds to help offset the tax, while basic grocery items such as milk and fruit are exempted altogether. "The real issue to overcome there, and that was our problem as well, is the distributive properties of it," says former Bank of Canada Governor David A. Dodge. "It's certainly not progressive."

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