What should be the U.S. VAT rate?

Have a look at this blog entry by Scott Hodge from the Tax Foundation. He writes about the potential implementation of VAT in the U.S., and at which rates VAT should be charged in every year over the next ten years to close the budget.

This is, of course, a rather futile exercise. VAT should be implemented as a part of  broad-based tax reform package, with lower corporate and personal tax rates and a simpler system. It is impossible to consider VAT separate from that entire spectrum of tax changes.

However, depending on those lower income tax rates and simplifications, I think that a 8% VAT would be very sensible as a start. It is not too high to create an instant sticker shock, and not too low to be rejected as a serious counterweight against the other elements of tax reform.

1 Comment

  1. Michael Bindner Said,

    February 21, 2011 @ 1:42 pm

    If domestic military and discretionary non-social spending is to be covered by the VAT, the rate should be 13.3%. If non Old Age and Old Survivors entitlement and social spending is included (include discretionary grants) are to be included, that will cost an additional 28.6% or 33.6% to cover a child tax credit for employees of $500/month/child and the health insurance exclusion. Of course, to have exclusions, the tax should be taken as Larry Lindsey's Business Revenue Tax rather than as a VAT.

    These figures are based on the 2011 budget document for FY2012 outlays, using Tax Policy Center excise tax model.

    They do not include funding overseas military operations, net interest or repayments to the Social Security trust fund – which would be funded by an income and inheritance surtax (distributions only). The surtax would also cover discretionary and entitlement spending if revenue targets are not made or if lower tax rates are desired. Whether these tax rates are high enough to balance the budget or not depends upon how much the rich want to kick the budget problem down the road.