Tax Analysts Blog

When It Comes to a VAT, Never Say Never

Posted on Jun 18, 2009

For an idea routinely dismissed as a political nonstarter (most recently by me), the value-added tax sure gets a lot of press. In recent weeks, we've seen articles by VAT fans (like Bruce Bartlett here), VAT foes (like Dan Mitchell and Chris Bergin), and an army of VAT skeptics (Ezra Klein, Tyler Cowen, Marty Sullivan and many others). These folks disagree on the desirability of a VAT, but they stand united on its prospects: "vanishingly unlikely," in the words of Kevin Drum.

No doubt. But observers (myself included) should distinguish between short-term probabilities and long-term prospects. A VAT is almost certainly out of the question this year. Probably next year, too, and maybe the year after that.

But that doesn't mean a VAT isn't likely.

To be fair, some VAT skeptics acknowledge the possibility that we'll see a broad-based federal consumption tax -- eventually. But they don't seem to recognize that today's VAT speculation -- however idle it may appear -- is part of a long-term policy process that's been under way for decades.

Tax ideas (like most policy innovations) take a long time to mature. Consider the income tax. Congress first considered one in 1815. Half a century later, lawmakers decided to actually give it a try, passing one in 1862 but repealing it in 1872. After another 22 years, they tried again, only to see the tax struck down by the Supreme Court. Finally, in 1913, Congress approved a permanent income tax.

So, it took 98 years to move the income tax from theory to reality. Even longer if you count the time it took to transform this "class tax" into a "mass tax." The 1913 levy was a puny little thing, with low rates and barely a handful of rich people paying it. World War I brought higher rates and lower exemptions. But it wasn't until World War II that most middle class Americans began filing returns.

None of this bodes well for the VAT. Or does it?

After all, the VAT is not new. The first serious proposal for an American VAT came in 1921, when economist T.S. Adams floated the idea. By the mid-1930s, it had a handful of champions, and the Treasury Department studied the idea in 1941. Since the 1950s, European use of the VAT has kept the issue alive on this side of the Atlantic. President Richard Nixon even considered one in the early 1970s.

So we're at least 75 years into the long policy process that usually precedes a revenue innovation. And for the last 40 years, tax experts have been churning out serious proposals. That sort of wonkish speculation may seem disconnected from political reality, but it's a vital step in paving the way for change. Kevin Drum makes this point implicitly in his dismissal of the VAT's short-term prospects. A VAT won't materialize, he writes, "without years of preparing the ground first."

He's right. But we've been preparing that ground for quite a while. The question is, when will it be ready?

Read Comments (1)

Robert GoulderJun 18, 2009

Which is most likely to occur first: a VAT become a reality in the U.S., or the
Detroit Lions win a Super Bowl?

My vote is with the VAT. Bring it on!

On a more serious note, what's wrong with the Graetz plan? Wouldn't that be the
logical blue print for a U.S. VAT? How else can Congress sell the idea to
mainstreet?

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