Tax reform is a royal pain – as Puerto Rico, Malaysia, Brazil, India and the Gulf countries have recently found out. Here in the U.S., tax reform has been an on-and-off hot topic, and over the past couple of weeks politicians, academics, journalists and traders have engaged in a Babylonian war of words and intentions.
The waterfall of issues cascades through the media: Must tax reform be budget-neutral? Should tax reform pay for “The Wall”? Are we not punishing ourselves – instead of Mexico – if we impose a tariff? Will we have agreement on a new tax system by August or will it take much longer?
Greg Mankiw, the conservative professor of economics at Harvard, summed it up very succinctly:
“1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.”
He says that this is in effect what the Republicans are proposing.
See (a little) more here: https://gregmankiw.blogspot.com/2017/01/a-three-point-tax-reform.html.
Mankiw also says that the retail sales tax is collected not collected at retail level, but along the “chain of production” (I think he means supply chain).
I don’t quite understand how a tax that is not collected at retail level, can be a retail tax. Also, how is this a VAT, if the tax is actually paid along the supply chain (and there is no offset / input tax mechanism). Third, if there is no offset, the import tax is a real business tax.