As the House Republican blueprint's destination-based cash flow tax comes under increasing attack from retailers and opponents, the GOP and other would-be tax reformers are looking at other options. And it probably shouldn't be shocking that a federal VAT is among the choices to potentially replace the corporate tax in any major tax reform effort.
European revenue agencies and politicians are probably wondering what took so long. After all, many EU nations have been slowly but steadily cutting their corporate rates and slashing their corporate tax base while at the same time raising their VATs. Heavy consumption taxation has long been a hallmark of tax regimes overseas, and even longtime holdouts such as Japan and the United Kingdom have gotten on board in the last decade or so.
The United States has always been reluctant to adopt this aspect of European tax systems. Republicans have long objected because they blame the VAT for the high tax rates across the Atlantic, while Democrats are skeptical of the regressive nature of the VAT. In 2010 the Senate famously voted 85 to 13 to condemn VATs when one was suggested by Paul Volcker's tax reform commission.
However, a VAT has been gaining steam lately. Maryland Democratic Sen. Ben Cardin proposed one in 2015, and Republican taxwriter Jim Renacci of Ohio followed suit in 2016. Renacci's plan would replace the corporate tax with a 7 percent VAT. Cardin would lower individual and corporate rates and replace the lost revenues with a VAT, but wouldn't end the corporate tax.
Republicans want to basically do away with the corporate tax. That is the goal of the House GOP blueprint and the destination-based cash flow tax. The corporate rate would drop precipitously, the United States would change from a worldwide to a territorial system, and businesses would be allowed full expensing. The cost of these changes would be offset by the 20 percent rate on imports, which has been projected to raise about $1 trillion over 10 years.
The Republicans need that revenue to deliver the tax cut they (and President Trump) have been promising. So as support for the cash flow tax falls apart, some GOP taxwriters have revived discussions of alternatives. And that has included Renacci's VAT. But replacing the corporate tax with a VAT, or even partially offsetting lost corporate tax revenues with any kind of consumption tax (including the cash flow tax on imports), is a very bad idea.
Regardless of where you stand on the debate over how much of the corporate tax falls on labor, it's hard to argue that some (likely most all) falls on capital. The corporate tax affects stockholders in the form of higher taxes on dividends. A functional corporate tax, in fact, is second only to capital gains taxes as a means to raise revenue from the investor class and capital holders. That makes it quite progressive.
A VAT, no matter how you look at it, is extremely regressive. It falls on consumption -- meaning that it hits workers and consumers much harder than the corporate tax. There are ways to design an overall tax and spending system that ameliorates this regressivity (most European nations have elaborate social safety nets), but it is extremely unlikely that Trump and GOP lawmakers would pair a consumption tax with higher social spending. In fact, that's probably the least likely outcome of any legislation from a Republican Congress.
That means that if Republicans used a VAT to cut corporate tax rates, they would be replacing taxes on capital with taxes on consumption. In other words, this kind of tax reform would exacerbate income inequality and be a massive giveaway to multinationals and other large corporations.
Taxpayers who are skeptical of higher prices under a destination-based cash flow tax should be angrier about the effects of a VAT. Simply put, a VAT is an even worse idea than the House blueprint, barring a massive change in how the government chooses to spend its money.