Dr. Leonard E. Burman, Daniel Patrick Moynihan Professor of Public Affairs, Maxwell School of Syracuse University
“As noted, the BPC proposed to introduce a small VAT in the U.S. The advantage of a VAT is that it does not tax saving and is thus thought to be more conducive to economic growth than the income tax. The tax has never gained traction in the U.S. because conservatives are concerned that it would fuel more growth in government and liberals worry that it is regressive. To address the first concern, I have suggested that a VAT be earmarked to pay for government’s health care costs. I believe this would actually help to constrain spending since, for the first time, consumers would see a connection between their health benefits and their tax bill. If health care costs continue to grow faster than the economy, the VAT rate will rise, which taxpayers would dislike. This could build support for sensible measures to constrain government health care spending.
The regressivity of a VAT may be offset by refundable tax credits designed to match the typical VAT levied on a family at the poverty line. This is similar to, although much smaller than, the “prebate” proposed as part of the national retail sales tax (or “FairTax”).”