A U.S. value-added tax could become practical politics in 2013. Washington's continuing budget spat shows that reducing deficits will be tough without new sources of revenue. A value-added tax could soon become a serious option. Using VAT to replace other taxes, especially corporate levies, could help boost U.S. competitiveness and growth.
The United States is the only big developed market that doesn't have such a tax. That's not a reason to have one, but it does justify careful consideration. Past discussions have foundered on political objections. Republicans generally don't like new taxes, and worry that if added to existing government revenue a VAT would finance an even bigger public sector. Many Democrats, on the other hand, fear that a consumption tax that replaced a personal income levy would be regressive, since poor people consume more of their income than those in richer strata of society.
Tax credits and other mechanisms could make a VAT less regressive. An alternative proposal championed by two Texas businessmen would instead use VAT to replace corporate income tax and employers' payroll tax. At approximately an 8-per-cent rate, they believe the substitution would be revenue neutral for the government. Such a tax would be paid mainly by businesses, making it less regressive. Provided imports were subject to the VAT and exports exempted, the tax would also make goods manufactured in the United States more competitive with those from other countries with consumption taxes.
What's most eye-catching is the modest rate of VAT needed to make a difference. The headline U.S. corporate tax rate of 35 per cent is high in a global context, raising concerns about competitiveness, even though myriad deductions mean effective rates are much lower. Replacing that with an 8 per cent VAT would compare favourably with an average of other countries' VAT rates of 18 per cent in 2010, according to the Congressional Research Service (CRS).
Whether replacing corporate or personal taxes, boosting the revenue-neutral level of VAT by two percentage points – for example from 8 per cent to 10 per cent – would yield around $100-billion annually in additional government revenue, based on estimates quoted by the CRS. That would gradually reduce deficits. If concerns about penalizing the poor can be overcome, a simple VAT that could make America more competitive ought to have broad appeal.