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Monday, May 12, 2008

VAT - Why do we avoid the word in tax reform debates?

A few days ago, the GAO released a report - Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition.

Why? Doesn't the GAO know that the US doesn't like the VAT?

In the report, the GAO notes that tax reform includes discussion of a VAT and that it was asked to do this report by Congressmen Jim McCrery and Jim Ramstad of the House Ways & Means Committee. The countries reviewed by the GAO in this report are Australia, Canada, France, New Zealand and the UK.

A search of bills in the 110th Congress with the word VAT only produced H.R. 2600 dealing with the WTO and border adjustments. Of course, there are proposals that are VAT variations, but they do not use that word. For example, the Freedom Flat Tax (H.R. 1040) appears to be the Hall/Rabushka model that was also promoted for years by Congressman Armey. That tax is a modified subtraction method VAT for businesses. The key modification is that businesses get a deduction for wages (which they would not get under a VAT because wages are a key element of valued added - which is taxed). But, the wages are taxed at the employee level to allow for a large personal/dependency exemption designed to alleviate some of the regressivity of a VAT.
But H.R. 1040 doesn't use the term VAT. Former Congressman Armey took the same approach. Years ago, I tracked down a few quotes from him including that the VAT is "possibly the most insidious tax scheme ever devised." [See article by Armey, Caveat Emptor: The Case Against the National Sales Tax, Policy Review, Summer 1995, p 31 and Anne Reilly Dowd, Politics and Policy: Real Tax Reform Gathers Steam, Fortune, 3/16/95, p 14 quoting Congressman Armey as saying, "a VAT is an insidious hidden tax, which I will fight forever!"] Congressman Armey had a PhD in Economics so it is likely he knew the flat tax was a modified subtraction method VAT. Perhaps it was the simpler credit invoice method he thought was awful.

In 1996, Congressman Gibbons introduced H.R. 4050 which specifically used the term VAT. This bill called for a 20% subtraction method VAT. This proposal kept an income tax for high income individuals to help preserve the distributional neutrality of the current tax system.
The AICPA and ABA Tax Sections (among others) have issued reports (years ago) on the credit invoice VAT. People have talked about it and many businesses today deal with it.

The US is the only industrialized country that doesn't have a VAT. In the tax reform discussions in the mid-1990s, Australia was also without a VAT, but it added a goods and services tax (GST) in 2000; the GST is a VAT.

Almost all states use a sales tax and some use either as an addition to a sales tax or instead of a sales tax, a gross receipts tax (GRT). The sales tax and GRT have flaws that could be eliminated with a VAT - notably pyramiding where a tax is paid on a tax because of the continual payment of sales tax or GRT along the production and distribution chain (although states do not impose sales tax on good purchased for resale, there is still sales tax paid on other items by businesses).
So, it seems that lawmakers may have a notion that the public doesn't want a VAT. While a VAT (as well as any tax), can be designed to be simple, the addition of special rates and exemptions creates complexity. The GAO report helps explain where complexities exist and the experiences in other countries - we can learn from the many examples out there of how to create a simple VAT.

While I'm not necessarily advocating for a VAT, I would say that as states continue to struggle with a variety of sales tax issues and some consider GRTs, and the feds consider a flat tax, national retail sales tax and other forms of consumption taxes, a VAT should also be considered. It should not be left out of the debate under some notion that the public has VAT-phobia or that VATs are too complex. And if the public and perhaps lawmakers have VAT-phobia, then we need to help educate people on how a VAT works, the forms of VAT and its advantages and disadvantages compared to other types of taxes we are familiar with.

In addition to the GAO report, some additional background information can be found at:

What do you think about a VAT? What do you think about being more honest in tax reform debates as to which proposals are VAT variations?

1 comment:

Nina Athena said...

What you have shared is very valuable and helpful. All the information you have shared gives me more insights on this. Thank you for sharing. Keep it up! Would like to see more updates from you soon.

Tax Professional