Tax Analysts Blog

The Flat Tax is a VAT . . . in 90 Seconds

Posted on Nov 4, 2011

Republicans despise the value-added tax. But the flat tax they admire so much is nothing more than a value-added tax split into two parts.

A value-added tax is a tax collected from business. The tax base is the difference between business receipts minus purchases from other businesses. There is no deduction for wages (so in effect wages are taxed at the business level). Individuals do not file returns.

A flat tax has two components: a business tax and an individual tax. The business tax is exactly the same as the VAT except wages are deductible (so in effect wages are not taxed at the business level.) The individual component of the flat tax is a tax on wages (as dividends, capital gains, and interest are exempt from tax). The advantages of dividing the VAT into two (besides political appearance) is that large personal exemptions can be added to the wage tax to alleviate the burden on the poor.

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