As a boy growing up on his father’s coffee plantation outside Saigon—in a country known then as French Indochina—Maurice Lauré liked to spend his evenings in the community library. The volume that young Maurice liked best was an oversized picture book showing the uniforms of French government officials. As a country that reveres its civil servants, France provided impressive uniforms not only for the military, police, and firefighters but also for customs agents, bank inspectors, drain commissioners, public health officers, mayors, municipal band leaders, and others.
The outfit that made the greatest impression on young Maurice Lauré was the uniform of the inspecteur des finances, or tax collector. Going back to the eighteenth century, agents of the French national tax authority wore an impressive blue suit with a yellow stripe down each leg and a golden epaulet on the right shoulder. “It seemed to me to be a terribly important corps with influence in all things,” Lauré recalled in an interview some fifty years later. “So I told my mother I would like to be an inspecteur des finances. She thought it was an excellent idea.”1
After a detour into the army’s engineering corps during World War II, Lauré did, in fact, join La Direction Générale des Impôts, the French equivalent of the IRS; sadly, that “very fine” uniform had been retired by the time he arrived. By the early 1950s, he was co-director of the agency, and one of the major problems he addressed was noncompliance by business taxpayers. France at the time imposed a tax on commercial activities of the type known as a turnover tax or a gross receipts tax. It was a complex edifice and fairly easy for businesses to avoid, which they regularly did. So Lauré, the engineer turned tax man, rolled up his sleeves and designed a new kind of tax, a levy that applied to virtually every business transaction but that was easy for tax collectors to track and thus hard for taxpayers to duck. In 1953, he published his seminal book, La taxe sur la valeur ajoutée (The tax on added value).
Drawing on earlier work by the German economist Wilhelm von Siemens and the American Carl S. Shoup (who had proposed a value-added tax for Japan during the American occupation after World War II), Lauré’s new tax on commercial transactions worked so well that it began to spread to other countries; Europe’s nascent Common Market (which became the European Union) made the value-added tax mandatory for all its member nations in 1967, on the theory that a unified market should have a unified tax structure. Fairly quickly, the idea was taken up in South America and Africa, in the fast-growing “Tiger economies” of East Asia, and then, somewhat later, in former British colonies like Australia, New Zealand, and Canada. By 2016, some 175 of the planet’s 200 countries had a value-added tax or a goods and services tax, which is another name for the same thing. This form of taxation brings in about 20% of all the government revenue in the world; among the members of the OECD, the club of rich nations, VAT payments constitute 33% of all tax revenue. For many countries, the VAT has become the most important single tax; in France, Lauré’s invention generates about 40% of revenues.
“The rise of the value-added tax,” observed the economic historian Liam Ebrill, “was the most dramatic—and probably most important—development in taxation in the last half of the twentieth century.” The law professors Alan Schenk and Oliver Oldman noted that “the VAT has spread more quickly than any other new tax in modern history.”2 The International Fiscal Association, a global think tank on government finance, has created the Maurice Lauré Prize to recognize the most innovative proposal put forth each year to improve tax collection. “If you look at the economic history of the last half century or so,” said Professor Richard Bird of the University of Toronto, “the VAT is one of the world’s biggest fiscal stories.” Professor Bird, who has helped design tax regimes for numerous countries, told me that “a VAT, or its twin, a GST, is an absolutely essential element of any tax structure today. To set up a tax system anywhere that didn’t include a VAT would be malpractice; it would be like creating a health-care system without hospitals. That’s why every responsible Finance Ministry has used it.”
Professor Bird’s comment is a backhanded slam at the United States, because our country is the only developed nation that has missed the boat on this successful new innovation. Almost all economists who’ve looked at the U.S. tax code, almost every blue-ribbon study commission, almost all presidential candidates who bother to propose a program of tax reform, agree that some version of the value-added tax could increase the fairness and efficiency of our tax system and reduce its mind-boggling complexity. And yet the United States stands alone among the world’s rich nations in refusing to implement this common levy.
It’s one of the curious manifestations of the concept of “American exceptionalism,” the idea that there’s no country like the United States of America. Of course we’re proud of the freedom and opportunity the United States offers its citizens and its immigrants. There may not be another country where the son of a visiting student from Kenya, raised by a single mother in modest circumstances, could grow up to be elected the head of state; there may not be another country where the son of an immigrant restaurant worker from Syria could create the company called Apple. There are unique aspects of the American way that make these success stories common, and nobody wants to lose the things that make our country exceptional. The problem comes when U.S. politicians are so determined to be exceptional, to do things our own way, that they refuse to implement a valuable idea that almost every other country on the planet has embraced to its benefit. This makes us exceptional, but not in a way that any other country would choose.
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THE VALUE-ADDED TAX IS essentially a sales tax—like the retail sales tax most Americans pay at the store every day—but one that is applied to every stage of commerce, not just to the final sale at the retail store. To see the difference, let’s imagine an American, whom we’ll call Mrs. Buyer, purchasing a dining-room table—a handsome mahogany table, stained a dark reddish brown—at a local emporium called the Acme Furniture Store.
Under the retail sales tax that is familiar to Americans, the transaction works like this: The retail price of the table is $600. But the customer, of course, has to pay more than that. If the local sales tax is 8%, Mrs. Buyer has to pay $648 for the table—the retail price, plus the 8% tax. The customer pays the tax; the furniture store plays the role of tax collector, taking in the $48 and sending it on to the local department of revenue. It’s important to note here that Mrs. Buyer doesn’t know whether the furniture store actually remits the tax payment to the government and doesn’t much care, either. It makes no difference to her.
Under a VAT regime, the government receives the same amount of revenue as the retail sales tax, but the collection process is different.
With the credits for taxes already paid, each link in this chain of production and merchandising ends up paying tax only on its contribution to the product along the way. That is, the value-added tax does what its name suggests: it taxes each link in the chain only on the amount of value it added toward the final product.
If you add up all the tax payments—$12 from the forest company, $8 from the wood products company, $12 from the furniture maker, $4 from the wholesaler, and $12 from the retail store—the government collects a total of $48 from the sale of this table. That’s precisely the same amount it would receive from an 8% tax applied only on the retail sale. But the chain of payments that take place under a VAT makes the VAT system work better—from the government’s standpoint, at least.
With a retail sales tax, Mrs. Buyer paid Acme Furniture $48 in tax, which the store is supposed to remit to the government. For the tax collector, an important aspect of this common transaction is that Mrs. Buyer has no incentive to find out whether the retailer actually forwarded this $48 to the department of revenue. It’s all the same to her whether the owner of Acme Furniture pays the tax or pockets the money. To economists, this is a fundamental flaw with a retail sales tax: nobody has an incentive to see that the tax is actually paid. And this was Maurice Lauré’s great gift to tax collectors all over the world; in his VAT system, everybody has an incentive to report the taxes that are due.
With a VAT, each buyer along the chain gets a credit for the sales tax it already paid. And thus each buyer has an incentive to report that tax payment to the government. In the example we just considered, Distinguished Tables reports that it paid a tax of $20 to Elite Wood Products; Distinguished reports that $20 so it can get the credit against the tax it owes. As a result, the tax agency knows that Elite received $20 in tax and should have remitted that $20; if Elite failed to pay the tax, the government will know about it and start collection procedures. Because every buyer along the chain has an incentive to report the tax he paid to his supplier, no supplier can get away with ducking the tax. In essence, the VAT is self-policing, which makes it a much harder tax to evade than a simple retail sales tax.
Beyond that, the VAT provides a more even flow of tax revenue to government coffers than a retail sales tax. Some products can take months or years to move from raw material to final retail sale. Under the retail sales tax, the government won’t get a penny of revenue until the retail customer makes that final purchase. With a VAT, in contrast, each step along the way from forest to furniture store triggers a tax payment.
Economists, too, think the VAT is a “good” form of taxation—or at least one that has fewer negative side effects than a tax on personal or corporate income. Because (almost) every government has to collect tax, economists want to see it done in a way that minimizes economic distortion. The VAT meets that test in several ways:
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ON THE OTHER HAND, there are also economic problems associated with a value-added tax—problems that prompt furious opposition whenever somebody proposes a VAT for the United States.
The VAT often works as an “invisible” tax. That is, the amount of tax is included in the retail price of the item, so the purchaser isn’t reminded that she’s paying a tax every time she buys something.
If you buy a book for $25.00 in the United States, you actually have to pay more; if the sales tax is 7%, the total price of that book will be $26.75. Because the price tag said $25.00, the buyer knows with every purchase that she’s paying a tax. But if you buy a book for €25.00 in France, you’ll pay only €25.00. The book was actually priced at €20.83; the 20% VAT, €4.16, is included in the retail price. So the buyer thinks she’s paying for a €25.00 book, as if there were no tax.
This system makes it easier for countries to raise their taxes; because the tax is invisible, consumers don’t know when taxes have gone up. If the VAT on that book goes from €4.16 to €4.66, the purchaser will now be charged €25.50. The customer may not be pleased about it, but she’s likely to blame the publisher or the bookstore for this increase.
Governments use this ploy all the time. Britain’s Conservative Party has always held itself out as the small-government, low-tax party. But after the Great Recession slashed government revenues, the Conservative government raised the national VAT rate from 17.5% to 20%. This increased the cost of almost everything Brits went to buy, but the tax increase was hidden in the retail price of each item. At the next election, in 2015, British voters told pollsters they still considered the Conservatives the low-tax party—a major reason the Tories won a big electoral victory that year.
To the economists, an invisible tax is a bad idea. People should know how much they’re paying—whether they are buying books or governmental services. I asked the policy director of the Netherlands’ national tax bureau about this aspect of the Dutch VAT, which is folded into the retail price and thus hidden from consumers. “As an economist, of course I deplore an invisible tax,” Michiel Sweers told me. “As a tax collector, I’m all for it.”
Of course, the VAT need not be invisible. Canada’s GST is applied like an American sales tax; there’s a pretax retail price for the product, and the sales clerk then adds the tax to the total due at time of purchase. So Canadian consumers are reminded of the tax with every ca-ching of the cash register. But Canada is the only country so far to reject tax-inclusive pricing.
Because it tends to make raising taxes so easy—and so free from consequences for the party responsible—champions of lower taxes consider the value-added tax anathema. Conservatives argue that the VAT is a “money machine” designed to churn out increasing revenue to pay for more and more government. The Wall Street Journal neatly set forth the anti-VAT line of argument in an editorial:
It’s the hottest trend among tax collectors, raising a gusher of revenue for spendthrift governments worldwide. We refer to the value-added tax (VAT). . . . Americans, be warned.
The VAT is a sort of turbo-charged national sales tax on goods and services that is applied at each stage of production, not merely on retail transactions. Politicians love it because it is the most efficient revenue-raiser known to man, and its rates can be raised gradually to finance new entitlements or fill budget holes. The VAT is typically introduced with a low rate but then moves up over time until it swallows huge chunks of national economies. . . .
Because VATs are embedded in the price of products, they can often rise unnoticed by the consumer, which is why liberals love them as a vehicle for periodic stealth tax hikes. . . .
[T]he VAT . . . makes every business an aggressive tax collector. . . . The businesses get a rebate on the portion they paid when they remit to the government the sums they collected, so the system motivates all companies to ensure taxes are paid in full.
The U.S. is a rare industrial nation that doesn’t have a VAT, though don’t think it can’t happen here. Liberals campaign on soaking the rich, but they know there’re only so many rich to soak. . . . [T]hey need a new broad-based tax that hits the middle class, where the big money is.3
The Journal’s observation about who ends up paying a value-added tax—that is, everybody who buys things, rich or poor—points to another downside of the value-added tax. It can be regressive; that is, it can have a bigger impact on low-income people than on the wealthy. People in the lower brackets spend a higher share of what they earn on basic consumption than the wealthy do, which means the VAT is proportionally a heavier tax on those least able to pay.
There are different approaches to dealing with the regressive nature of a VAT. One is to make certain items tax-free—items that are essential for life and make up a major share of purchases by lower-income consumers. Typically, countries will exempt groceries, medicine, and school supplies from the tax. Some places say that work clothes or cleaning supplies or pet food should be taxed at a lower rate than less essential items. But this becomes another instance of a problem we’ve seen throughout this book: equity in taxation often comes at the price of simplicity. Once you start varying the rates, or exempting certain purchases completely, the tax regime gets complicated fairly quickly. Many countries apply the full VAT to restaurant meals—on the theory that the rich are more likely to dine out—but do not tax groceries that are to be consumed at home. That means a clerk should not collect tax on the sale of eight ounces of ham, but she should on three ounces; in the eyes of the law, the former is a grocery sale and the latter is lunch. Canada’s VAT applies to one to five doughnuts—that’s considered “immediate consumption”—but not to six, which are classified as “basic groceries” to be taken home.4 It becomes a complicated mess for some guy who’s just trying to make a living selling doughnuts.
A simpler way to deal with this problem—the method recommended by the International Monetary Fund and other tax-advisory organizations—is to charge the same VAT for everything but then to give a credit to low-income people through the income tax. This, too, can get complicated. But because most developed countries already have special income tax provisions for low-income families—such as the earned income tax credit in the United States—it’s something tax authorities know how to do. New Zealand has chosen to deal with the problem of regression this way: Its 15% GST applies to virtually everything, including the goods and/or services provided in a brothel. But it has mechanisms to refund the GST payments for people in the lowest brackets.
The system of tax collections and credits for every link in the production chain is not simple. There’s a definite cost involved in setting up a VAT regime, and there are compliance costs for those who have to pay the tax. Once the system is in place, though, it should be cheaper and easier than what we’ve got today. The economists Joel Slemrod and Jon Bakija reviewed several studies on administrative costs of different tax regimes. They concluded that “a broad-based, single-rate VAT could involve considerably lower enforcement and compliance costs than the current income tax in the United States.”5
Beyond that, imposing a VAT raises prices, which is likely to deter consumption and stifle economic growth. The Japanese learned that the hard way. After the burst of the “bubble economy” of the 1980s, business activity and tax revenues fell sharply. The Japanese government began running up huge annual deficits. More revenues were needed, so the government implemented a VAT in 1989 and raised it in 1997. This made the recession worse. The price of everything went up. People stopped shopping. The economy slumped even further. It took years before economic activity returned to pre-VAT levels. To avoid a repeat of that disaster, Japan’s prime minister decided in 2016 to cancel a scheduled increase in the VAT rate.
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ALTHOUGH THE BASIC STRUCTURE of VAT/GST all over the world is essentially the same thing that Maurice Lauré implemented in France in the 1950s, there is a broad range of tax rates and regulations governing this consumption tax. In the European Union, member nations are required to have a VAT of at least 15% so that no member tries to lure shoppers into its stores with a sharply lower sales tax. (The EU also allows countries to set reduced rates on items like food, medicine, and books.) Most EU members impose a tax higher than that; in 2016, the average rate in Europe was 21%. As we’ve seen earlier, the current world champion at gouging shoppers is Hungary, with a standard rate of 27%.
Hungary offsets this severe tax bite with lower rates for certain basic commodities, like food and medicine. Many other countries do the same. Going in the other direction, some nations impose a higher VAT for luxury goods like perfume and jewelry; the luxury VAT can run as high as 85% (in Chile), which the buyers of diamond-encrusted watches and pearl necklaces can presumably afford.
Here’s a list of various countries and their standard VAT rate, as of 2016:6
|
Nation |
Standard VAT/GST rate |
|
Argentina |
21% |
|
Australia |
10% |
|
Belgium |
21% |
|
Canada |
9.975% to 15% |
|
Chile |
19% |
|
China |
17% |
|
Denmark |
25% |
|
Egypt |
10% |
|
Finland |
24% |
|
France |
20% |
|
Germany |
19% |
|
Hungary |
27% |
|
Ireland |
23% |
|
Italy |
22% |
|
Japan |
8% |
|
Malaysia |
6% |
|
Mexico |
16% |
|
New Zealand |
15% |
|
Norway |
25% |
|
Russia |
18% |
|
South Africa |
14% |
|
Sweden |
25% |
|
U.K. |
20% |
|
United States |
0% |
Because the VAT is such a ubiquitous aspect of daily life, the consumption tax has predictably become the focus of furious political battles. Moviemakers in Japan, arguing that the nation’s once great film industry was dying, lobbied for years to get movie tickets exempt from the VAT (and won). Under similar lobbying pressure, France sharply cut the VAT on restaurant meals in 2009, and Germany cut the tax on hotel rooms in 2010; in both cases, subsequent studies showed that only a small fraction of the savings was passed on to consumers through lower prices.7 Poland applied a zero rating (that is, no VAT) on disinfectants and had to fight the Brussels bureaucracy all the way to the European Court of Justice (in essence, the EU’s Supreme Court) to defend it. All over Europe, women’s groups have launched prolonged battles against applying the VAT to tampons, calling this a tax on women. Results to date are mixed: women have won a zero rating for tampons in Ireland and reduced tax rates in Britain, France, the Netherlands, and Spain. But most European countries still tax tampons at the full rate, which means Hungarian women get to pay 27% over the retail price every time they stock up.
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STUDY AFTER STUDY and blue-ribbon panel after blue-ribbon panel have concluded that a VAT would work in the United States. If the revenues were used to eliminate, or at least reduce, the tax on interest, dividends, and capital gains, the consumption tax might encourage savings and investment. There would be a definite start-up effect, both in administrative costs and in higher retail prices, but over time these impacts should disappear. For this reason, presidents from Nixon to Obama have thought out loud about establishing a VAT.
The most ambitious recent study came from the George W. Bush administration. Just after his reelection in 2004, Bush created a study commission, the President’s Advisory Panel on Federal Tax Reform, with instructions to leave no stone unturned in search of ways to make the U.S. tax code fairer, simpler, and more efficient. The group allocated a great deal of debate, and a full chapter in its final report, to the idea of a federal VAT. It concluded that such a tax would allow for a substantial reduction of income tax rates, with no loss of revenue. In an earlier section of its report, the advisory panel had proposed a revamped federal income tax, with a progressive rate structure of 15% for the lowest brackets and then additional brackets of 25%, 28%, and 33% for people at higher incomes. But if the United States adopted a 15% VAT on purchases, the income tax could be slashed to two brackets: 5% for lower-income families and 15% for taxpayers above the median income. With a top rate of 15%, few taxpayers would find it necessary or productive to invest in complicated tax-avoidance schemes, so compliance would go up and IRS administrative costs would go down. Accordingly, the panel reported that imposing a federal VAT could be a key element of successful tax reform.
But this study took place in 2005, when the polarization and division that mark American politics today were already starting to take root. Sure enough, the President’s Advisory Panel on Federal Tax Reform was so badly divided that it couldn’t muster a majority to support any plan. On the VAT, the final report said, “Panel members recognized that lower income tax rates made possible by VAT revenues could create a tax system that is more efficient and could reduce the economic distortions and disincentives created by our income tax. However, the Panel could not reach a consensus on whether to recommend a VAT option.
“Some members of the Panel who supported introducing a consumption tax in general expressed concern about the compliance and administrative burdens that would be imposed by operating a VAT,” the report explained. “Some members were also concerned that . . . the VAT would be a ‘money machine.’ . . . Others expressed the opposite view and regarded the VAT as a stable and efficient tool that could be used to reduce income taxes, fund entitlement programs, or serve as a possible replacement for payroll taxes.”8
One substantive objection to a national VAT or GST in the United States is the federal system. There are thousands of state, county, city, and special district governments that must raise revenues themselves, and many of them do it through a retail sales tax; Professor Jay Rosengard of Harvard’s Kennedy School estimates there are more than six thousand different sales taxes in place in the United States today. In most communities, they accumulate atop each other. The sales tax in Denver, where I live, is fairly typical. Denver’s 7.62% sales tax is a combination of state, county, and city levies, along with an additional 1% for the local transit district, 0.1% to pay for the Denver Broncos football stadium, and another 0.1% for something called the Scientific and Cultural Facilities District, which pays for museums, libraries, zoos, and the like. If the United States were to add a significant new value-added tax on top of all those local sales taxes, we’d be approaching European levels of tax on most purchases.
President Bush’s advisory panel worried about this aspect of a federal VAT. “Coordinating between states’ retail sales taxes and the VAT would be a major challenge,” its report said. “States likely would view a VAT as an intrusion on their traditional sales tax base.”
Around the world, though, the existence of local sales taxes has not been an insurmountable obstacle to imposing a federal VAT. Several countries have done exactly that, including New Zealand, Australia, and Great Britain. In some countries, the federal government collects all the tax and then distributes it to local governments. In others, there’s a tax like the combined sales tax I have to pay in Denver, with part of the take going to the local government and part going to the national tax agency. That’s the system Canada has set up, although getting there wasn’t a particularly easy process.
For decades, Canada imposed a tax on manufactured goods called the manufacturers’ sales tax (MST). Most Canadians were unaware of its existence, even though it was passed on to consumers through higher prices. The business community fought consistently for its repeal. Economists, too, opposed this tax; after all, it was a penalty on producing things, something any developed economy should encourage, not penalize.
As in the United States, there were advisory panels and study commissions on tax reform at regular intervals. As in the United States, nearly all of them urged the country to adopt a value-added tax at the federal level. By the start of the 1990s, with federal deficits increasing and the MST getting stiffer—the rate went from 5% to 13.5% in a dozen years—it was clear, even to the antitax Conservative Party, that the time had come. The Conservative prime minister, Brian Mulroney, muscled a consumption tax through the Parliament. Following New Zealand’s example, Mulroney called it a GST. It took effect on January 1, 1991, and was immediately unpopular.
A major reason was that nearly all Canadians were already paying a sales tax. Every Canadian province except one had a retail sales tax in effect at the time. When the GST came along, people suddenly found themselves paying a new tax, piled on top of the provincial sales taxes already in place. Three provinces went to the Supreme Court to fight this new federal impost. To duck the tax, Canadians by the millions started traveling south to make major purchases (a practice that ended after 9/11, when crossing any U.S. border became much more difficult). Although the 1991 GST brought in significant revenues to pay for popular government services, Canadians were still furious in 1993, when the Conservative government had to stand for reelection. The Liberal Party leader, Jean Chrétien, based his entire campaign on the new tax—the Liberals’ slogan was “Axe the tax”—and won such a huge victory that Mulroney’s Conservatives saw their sixty-nine seats in the Parliament reduced to two.
In fact, though, the Liberals couldn’t “axe the tax.” By the time Chrétien came to power, revenues from the GST were such an important part of the federal budget that the new levy simply had to stay in place. Chrétien offered voters an apology but then started negotiating with the provinces on a consumption tax that combined the provincial and federal taxes. The result was a new levy, the harmonized sales tax (HST), with proceeds split between the national and the provincial governments. Nearly all the provinces have gone along; 80% of the Canadian economy today operates under the GST/HST arrangement. Both Conservative and Liberal governments have backed this regime for more than two decades. In 2016, the federal portion of this tax was 5%; provincial rates, added to the federal levy, ranged from 4.75% to 10%. “Canada’s experience shows that you can impose a federal VAT on top of local sales taxes and make it work,” said Professor Bird of the University of Toronto. “And it might even be easier in the [United] States, because you could learn from our example.”
The major problem facing a VAT or GST in the United States is not so much administrative as political. The tax is known as a “money machine,” and that in itself is enough to make it a bad idea for many American political leaders. It would bring in more revenue, which could fund more government. Grover Norquist, the founder of the tax-cutting lobby group Americans for Tax Reform, likes to say that “VAT is French for big government.” Daniel Mitchell of the Cato Institute has said the term “VAT” evokes certain other terms, including “Bad! Europe! France! Greece! Ebola virus!”9 Some politicians who might favor a VAT because it taxes consumption, not labor or thrift, have been scared away by the potential political cost. On Capitol Hill, the very idea of a VAT tends to bring back scary memories of a U.S. representative from Oregon, a Democrat named Al Ullman.
When I was covering Congress, Ullman was a powerful figure: a twelve-term veteran who was chairman of the House Ways and Means Committee, the tax-writing committee. A former teacher, he was a serious student of tax policy. When I would interview him, he showed no interest in sports or hobbies or the politics of his sprawling eastern Oregon district; he liked to talk tax. After conferring with countless economists, Ullman became Congress’s leading champion of a national VAT and proposed such a tax in 1979. Ullman saw the VAT as a way to cut personal and corporate income taxes; the Republicans saw it as a new tax on hardworking Americans and poured money into his district to defeat him. Sure enough, he lost the 1980 election, although it’s hard to say the VAT was the only reason; Ronald Reagan carried his district by a whopping margin that year. But ever since, any mention of a VAT on Capitol Hill has prompted the comment “Remember Al Ullman.” Another top Democrat, Senator Byron Dorgan of North Dakota, used to tell his colleagues, “The last guy to push a VAT isn’t working here anymore.”
And yet you can make a strong case that the guys on Capitol Hill—particularly conservatives—should be pushing a VAT.
“The irony is that the VAT is probably the ideal tax from a conservative point of view,” wrote the Republican tax expert Bruce Bartlett, who oversaw tax policy in the Treasury Department under the first president Bush. “As a broad-based tax on consumption it creates less economic distortion per dollar of revenue than any other tax—certainly much less than the income tax. If Republicans are successful in defeating a VAT, the alternative will inevitably be significantly higher income taxes, which will do far more damage to the economy than a VAT raising the same revenue.
“I myself opposed the VAT on money-machine grounds,” Bartlett continued. “I changed my mind when I realized that there was no longer any hope of controlling entitlement spending before the deluge hits when the baby boomers retire; therefore, the U.S. now needs a money machine.”10
Bartlett is not alone in his party. Alan Greenspan, the Federal Reserve chairman who endorsed the Bush tax cuts at the start of this century, has argued that a VAT is the “least worst” way to raise taxes. Now and then Republicans propose a VAT/GST or a similar form of consumption tax, operating on the theory that it’s better than the personal and corporate income tax regimes we have in place today. During the 2016 presidential primaries, several of the GOP candidates suggested plans—although they were not always crystal clear—for a national consumption tax. The most fully developed was a classic value-added tax put forth by the Texas senator Ted Cruz, who offered himself as the most conservative of all the sixteen Republican hopefuls.
Cruz, of course, did not use the tainted words “value-added tax.” He called his plan, alternately, the “simple flat tax” or the “16% business flat tax” (BFT). He promised that his new tax would eliminate the corporate income tax, the estate and gift tax, the ObamaCare taxes, and the payroll taxes that pay for Social Security and Medicare (“while maintaining full funding for Social Security and Medicare”). He insisted that his plan would allow Washington to set everybody’s personal income tax rate at 10%—a major tax cut for most Americans—while maintaining the tax deductions Americans like best. To do all that, Cruz proposed a 16% value-added tax on businesses. He said that every business should file a quarterly tax return listing its total revenue for the quarter but subtracting its total purchases (but not wages). “This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment,” Cruz wrote. The difference between a company’s revenues and its purchases—that is, the amount of value added by that company—would be taxed at 16%. Because each company would report to the government how much it paid to all of its suppliers, the tax would be self-policing.11 And by the way, Cruz added, “the business flat tax in my proposal is not a VAT.”
Economists from the left and the right begged to differ. All of them gave Cruz credit for laying out a tax plan in detail, something few of his rivals for the presidency in either party were willing to do. But the economists agreed that the business flat tax was, in fact, a VAT, because it tallied the difference between a company’s output and its input—that is, the value added—and taxed that amount. Professor Len Burman, a tax economist and head of the Tax Policy Center, called the Cruz tax plan “a textbook example” of a VAT. Alan Cole, an economist at the corporate-funded Tax Foundation, agreed: “This is definitely still a value-added tax.”12
Cruz felt a need to deny that his BFT was really a VAT, because the money-machine view of that tax makes it a nonstarter for small-government advocates. In fact, though, it’s not so clear that this form of tax is necessarily a recipe for bigger government. “In most countries,” noted Professor Bird, the VAT or GST “has not resulted to any significant extent either in higher taxes or bigger government, but rather in governments being able to finance their expenditures in economically less damaging ways.”13 In Britain, for example, the increase in VAT from 17.5% to 20% was followed by a significant cut in government employment and welfare spending. (The government used most of the increased revenue to shore up the National Health Service, the country’s most popular public program.)
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WHETHER IT’S A VAT, a GST, a BFT, or any other three little letters, can a national consumption tax ever be enacted in the United States? The former Treasury secretary Lawrence Summers offered a tongue-in-cheek prediction of when that could happen. “Liberals think the VAT is regressive,” Summers said, “and conservatives think it’s a money machine. If they reverse their positions, the VAT may happen.”