The Stash

Is There a Value-Added Tax in our Future?

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I'd say the odds are better than even. Which makes this excellent Catherine Rampell piece about the VAT in today's Times a must-read. Rampell  lucidly walks you through the way the tax works and the arguments for and against--including one I'd never thought of before but which makes perfect sense: 

When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale.

Macy’s checks to see how much the previous companies in the supply chain the fabric store and the tailor have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government [in Rampell's hypothetical].

The government receives $5 total, or 10 percent of the final purchase price, but from three different businesses. ...

Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing [emphasis added].

Brilliant. No wonder the wonks like the VAT so much.

I'd just add one other argument in favor of the VAT--actually any consumption tax--which is that, if you announce that you're going to start levying it in a year or two, the effect should be to increase consumption in the near-term, as people rush to make purchases before the tax kicks in. That's not a bad feature at a time when consumption is fairly depressed. And other kinds of taxes--like income taxes--would likely have the opposite effect, leading to a near-term increase in saving/decrease in consumption in anticipation of the future tax hike. So the VAT has the advantage of potentially boosting the economy in the short-term while reining in the deficit in the long-term--one of those rare solutions to the problem I describe in my latest print piece.

P.S. Credit where due: Bill Gale of Brookings walked me through this logic when I was working on the piece.

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