Tax Analysts Blog

U.S. Tax Exceptionalism

Posted on Sep 16, 2013

The United States is the only nation of any significant size without a VAT. The United States also has the world's highest corporate tax rate. Those two facts are not unrelated. Despite ever-tightening budgets, governments around the world over the last two decades have steadily reduced their corporate tax rates. How were they able to do this? They made up lost corporate tax revenues by relying more heavily on their VATs. The chart below, taken from a new paper by economists at the OECD, is one illustration of this. The experience of Japan, the United Kingdom, and New Zealand are prime examples.

For economists this is a no-brainer. The corporate tax--with its arbitrary and excessive burden on the profits of certain businesses--is our most damaging tax. A broad-based consumption tax, like a VAT -- which unlike the income tax is not inherently biased against saving and investment -- causes the least harm to the economy. Replacing corporate tax revenues with consumption tax revenues is the most straightforward way to improve America's tax competitiveness. Everything else is just nibbling around the edges.

Of course, that move would make a tax system less progressive. To address this, economists suggest providing rebates to low-income households to make up for their disproportionate burden. Another idea that does not get enough discussion is to simply accept that a more competitive tax system will become more regressive and to use additional VAT funds to expand social programs to help America's struggling poor and middle class.

It is not the political left, however, that is the main obstacle to the U.S. adopting a VAT. Conservatives are dead set against the idea even though they hate the income tax and at every opportunity seek to reduce taxes on saving. That is because they fear the VAT is a money machine that, once in place, will make it too easy for government to expand to European levels. In contrast, conservatives and business groups outside the United States loudly endorse the expansion of VATs as good replacements for corporate taxes. Whether or not those fears are well founded, we must recognize that as long as we adopt the approach of relying primarily on income and corporate taxes to fund our government--whatever size it is--we are stifling U.S. competitiveness while the rest of the world moves ahead.

Read Comments (4)

emsig beobachterSep 16, 2013

Are you suggesting replacement of all federal income taxes with a VAT? A
partial replacement? How would you coordinate a federal VAT with state and
local sales taxes?

Parenthetically, the OECD nations tow which you refer also rely, to some extent
on income taxes, albeit to a lesser extent than the USA.

Martin LobelSep 17, 2013

Speak about a narrow perspective. Don't tax multinational corporations because
the current system allows them to evade taxes! Instead shift the burden of
paying for government through a VAT which would be paid for primarily by the
middle class which continues to lose economic ground while the very rich
continue to increase their share of our national wealth? While it is true that
a VAT could raise lots of money, experience in Europe shows that VATs rapidly
become as complex as income taxes. How about following the OECD lead and adopt
a form of unitary taxation that will source income appropriately?

amt buffSep 17, 2013

When I saw the title I felt sure this article would describe the USA's taxation
of income earned abroad by its citizens.

Steve AbramsonSep 20, 2013

Revenue-neutral VAT replacement of the CorpIncTax would stimulate economic and
jobs growth by making U.S. manufacturing more competitive, as the VAT is
border-adjustable, i.e., subtracted from exports and added to imports.

Also, with Zero CIT, profits stashed in currently lower-CIT countries would
return home to stimulate growth.

Also, replacing the CIT by a VAT would eliminate the double-taxation of
dividends and stocks would soar.

A VAT with zero exclusions would skew the burden away from small business and
onto large multinationals, which would no longer be able to escape taxation by
shifting profits abroad.

For more detail, see the video at

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