Like most people, my first reaction to the discussion of a value added tax (VAT) is "no way." But when you sit back and think about it, maybe a VAT makes some sense.
The VAT has been mentioned in some of the proposals to address the U.S. budget deficit. First, it is important to realize that just about every major economy the U.S. competes with has some sort of VAT tax. Because they get much of their government funding from a VAT, these other nations are able to reduce income taxes on both businesses and individuals. This (along with lower wages) has led some U.S. businesses to consider going overseas.
However, by better aligning U.S. government revenue streams with their foreign competitors, it makes it easier for the U.S. to retain and attract more businesses. Corporations who have hesitated to repatriate earnings achieved overseas will no longer believe they must leave them there to avoid high tax rates.
The VAT is one of the most efficient ways a government can collect taxes. Like a sales tax, the seller collects the VAT on their sales. The difference is that each business (raw material suppliers, manufacturers, and retailers) also gets a tax credit for the purchase of their inputs. This means the purchaser makes sure the seller properly records their VAT payment. Businesses are actually checking on one another to make sure they get their tax credit.
The chief complaint about the VAT is that it is a regressive tax, charging everyone the same rate on their purchases regardless of their income. This weakness can be addressed by introducing more progressivity in the income tax rates. Low-income individuals might even receive a tax credit that would represent a reimbursement for their VAT payments. But in all cases, because the government has an additional revenue stream, the income tax rates would be reduced.
The National Retail Federation recently warned of the affects of a VAT without changing income taxes, but I think it might be worthwhile to consider the combination of a VAT and lower income taxes. This could sustain the government revenues while putting U.S. businesses in a more competitive position because of their lower income tax rates. It might even bring home some of those overseas assets for investment in the U.S.
Discussion Questions: Does the argument work that collecting VAT in this country would make the U.S. more competitive with its rivals overseas that do the same? Is it politically feasible that a major new tax structure could be implemented in this country?