Archive for U.S. VAT?

TGIF: A VAT for the U.S.?

Today is Friday December 12, 2014 and the Progressive Consumption Tax Act has seen the light of day!

But wait – is it a VAT? I will have a look at the bill text (see below) and let you know. There is no rush; this is just a discussion document and won’t get any serious consideration any time soon.

The press release is here:

Pundits did not take long to take a VAT entirely out of its context – see

“If US producers sell to other countries most charge a consumption tax when the US producers have already paid US taxes.  If we ever want to come out of our current economic malaise we need  to make more of what we consume and make our products globally competitive.”

Click here for the pdf of the bill text:

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U.S. Lawmaker to Release VAT Legislation

“Senate Finance Committee member Benjamin L. Cardin, D-Md., told Tax Analysts December 8 that he will release legislation later in the week proposing a U.S. VAT that he hopes will prompt serious discussion on the matter in the 114th Congress.
“It’s finished,” Cardin said of the bill, adding that he will likely release it on December 10.
Cardin said he is not seeking cosponsors on the bill at this time since it will have to be reintroduced next year but noted that he’s worked with many lawmakers who are interested in the legislation.”

The link is here:

So the Senator releases legislation now, to be discussed next year. I will let you know when it’s time to wake up.

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The prospect of VAT in the U.S.

Reuven Avi-Jonah (Irwin I. Cohn Professor of Law, the University of Michigan) writes about the great consumption vs. income tax debate from a historical perspective.

The focus here is not on which tax base is better, but rather on how this debate evolved over time inside and outside legal academia. As we shall see, there was one point in which the consumption tax came close to being adopted – in 2005, when it was one of two alternatives recommended by the Bush tax reform panel. But the moment passed, and it seems unlikely to return.

Download his paper here

(oddly the paper is marked as a draft)

Hat-tip to Peter Devlin.

And a couple of years ago I co-authored a book on US VAT – feel free to download from the link below.

Download (PDF, 1.69MB)

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Tax Professor Pushes Plan to Tax Consumption

It’s been a while since I posted about the potential for US VAT. The reason is simple – ‘it ain’t gonna happen any time soon’.

Professor Michael Graetz is the leading proponent of a federal consumption tax, and is still pushing his proposal.

He would impose a new national value-added tax and use the money, in part, to eliminate the income tax – and the filing of income tax returns – for families with incomes under $100,000. For others, there would be three marginal tax brackets (14%, 27% and, for income above $600,000,  31%.)  He’d also lower the corporate tax rate to 15%, cut the payroll tax and give cash to low-income families with children.  For more, see the full tax plan.

“It does not tear up the tax code and start over,” Mr. Graetz says. “It simply returns the nation to its pre-World War II tax system, where most revenue came from taxing consumption — then in an archaic way, through tariffs — and the income tax was limited to its proper function of providing tax justice through progressivity for folks at the very top. My proposal is designed to promote more economic growth without shifting the tax burden away from the top to families with less income.”

via Tax Professor Pushes Plan to Tax Consumption – Washington Wire – WSJ.

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Forbes: Income Tax vs. VAT

It is interesting to see that there are still commentators who see the VAT world in black-and-white: if there is a VAT, you can’t continue to collect income tax.
Jeremy Scott, contributor at Forbes Magazine, reviews the regressive VAT against the progressive income tax and concludes that a VAT in the U.S. would affect the middle class (whatever that is, these days) the most.

At the end of the day this is of course a purely academic discussion. Whenever a VAT is introduced, the taxpayer should be somewhat relieved of the burden of income tax, but not entirely. Plenty of examples are at hand world-wide, most recently the implementation of VAT in Kenya.

The practical issue that no-one in the U.S. is willing to address is the matter of the state and local governments that collect a hodgepodge of indirect taxes (most notably sales tax), versus the federal need for additional revenue.
In a somewhat, but not entirely similar scenario, China has been very forceful in integrating the business tax (local government revenue) into the VAT (central government revenue). Local governments get to keep whatever is left of the local indirect taxes, as well as get a share of the VAT pie.

Practically and politically there is no way that this will ever happen in the U.S., given that politicians are even willing to shut down the store for something as elementary and essential as healthcare for all.

The U.S. income tax system is progressive because we tax the wealthy at higher rates. A VAT is regressive because it generally benefits higher-income taxpayers (who consume proportionately less of their income and wealth). There is no good reason to reverse the tax-friendly policies for the middle class that the United States has adopted over the last 35 years.

via It Isn’t Time To Bury The Income Tax Just Yet – Forbes.

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VAT and Trade Presentation

Traveling today, but I just wanted to share this posting / slidepack about the impact of VAT on foreign trade. I strongly believe that this aspect of “border-adjusted” VAT is by and large a misconception. If VAT would NOT be zero-rated for exports, it would become a cost of doing business for the exporter. That’s not how VAT works in its most basic form, and – by the way – also not how sales tax works.

VAT and Trade Presentation – Trade Reform.

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IMF tells US to adopt VAT

TMF reports:

On Friday 14 June, the International Monetary Fund warned the US that its debt was heading toward unsustainable levels of 110% of GDP – many economists see 70% as the limit before growth is impeded. The IMF proposed introducing a full Value Added Tax regime to help control the debt.

They also provide interesting stats on how VAT progresses as a popular revenue source.

IMF tells US to adopt VAT as EU slashes Corporate Taxes.

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