Altshuler, Rosanne, Department of Economics, Rutgers University, Testimony Before the Committee on Ways and Means, Hearing on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

…“A VAT is a type of consumption tax that is similar to a retail sales tax but is collected in smaller increments throughout the production process. This form of consumption tax is part of the tax systems of nearly 150 countries worldwide. All OECD member countries except the United States have VATs. In 2007, revenues generated by the VAT represented almost 19 percent of the total tax revenues of OECD countries and about 20 percent of the total tax revenues of European OECD countries.

Adding a VAT to the U.S. federal tax system could help address the medium and long-term revenue shortfalls forecast for the United States. The VAT is particularly effective in raising substantial amounts of revenue in a relatively efficient manner and has proven to be an administrable tax.

If the U.S. were to adopt a VAT, it could rely on the experience and best practices of other countries in setting up and administering the tax. In addition to these attributes, the VAT has a number of other advantages. First, a portion of the revenues from a VAT could be used to finance reductions in statutory income tax rates. Two tax systems (a VAT and an income tax) with low tax rates may be superior from an efficiency and administration perspective to an income tax system with higher statutory rates. Second, given the size of projected future budget deficits, adding a VAT to our current system to generate revenues for deficit reduction alone would likely have positive effects on economic growth. Third, a pre-announced and phased in VAT might stimulate the economy by encouraging consumption in anticipation of the imposition of the tax.

Finally, while the states are likely to protest, a properly designed VAT may actually help force them to redesign or improve their retail sales taxes.”…

“…The VAT on its own cannot solve the country’s fiscal problems. And introducing a VAT has its own problems.  If we adopted the VAT, we would have to institute some form of rebate to offset its regressivity and make every effort to adopt the broadest possible base. We would need to increase IRS resources for administration and be attentive to a range of compliance issues. But we must recognize that near and long-term fiscal pressures will require that we raise more revenue from our tax system. The VAT is an efficient revenue raiser that is likely to be significantly less damaging to economic growth than increasing personal and corporate statutory rates. After considering the range of issues associated with adopting a VAT, I conclude that the United States may be best served by combining a base-broadening reform of the current income tax system with the introduction of a VAT.”

 http://waysandmeans.house.gov/UploadedFiles/Altshuler_Testimony.pdf

 

 

Graetz, Michael J., Professor of Law, Columbia Law School, Statement At a Hearing of the House Ways and Means Committee on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

“…It is the central contention of my book, and the centerpiece of my proposal, that the fundamental reform required to create an internationally competitive, administratively efficient, and viable long-term solution to our funding requirements is to make a different choice.  We should eliminate the income tax for the overwhelming majority of Americans and replace it with a broad-based tax on sales of goods and services. We should return the income tax to its original, manageable purpose: the collection of a simpler tax on high-income earners who tend to have multiple income sources. And we should dramatically lower our corporate income tax rate. In order to do that, we need to tax consumption, sales of goods and services.”…

“…For those unfamiliar with my Competitive Tax plan, it has four key pieces:

• First, enact a value added tax – a broad based tax on sales of goods and services now used by more than 150 countries worldwide.  We are the only OECD country that does not have a VAT or, as it is sometimes called, a goods and services tax.

 • Second, use the revenues produced by that consumption tax to finance an income tax exemption of $100,000 of family income and to lower substantially the individual income tax rate on income above that amount.

 • Third, lower the corporate income tax rate to 15%, or at most 20%.

 • Fourth, replace the earned income tax credit and provide low and middle income families with tax relief from the VAT burden through payroll tax offsets and debit cards….”

 “…Opponents of value-added taxes often complain that they are regressive, and if such a sales tax were to fully replace our income tax, as proponents of the so-called Fairtax urge, tax burdens would indeed be shifted down the income scale.  So I designed my Competitive Tax Plan in a manner generally to change neither the progressivity of the tax system nor the amount of revenue produced under current law.  This allows my proposal to be evaluated by comparing it directly to the current system, and it follows the important precedent of both distributional and revenue neutrality that facilitated enactment of the 1986 Tax Reform Act, our last major tax reform…”

“…A great advantage of my Competitive Tax plan is that, by introducing a border-adjustable value added tax on sales of goods and services and thereby decreasing our nation’s need to rely so heavily on the income tax to finance our government’s spending, we can have a tax system that is fair and yet substantially more favorable to economic growth than our current system…”

 http://waysandmeans.house.gov/UploadedFiles/Graetz_Testimony.pdf

Bartlett, Bruce, Statement Before the Committee on Ways and Means U.S. House of Representatives, July 26, 2011

…“There are, however, a number of problems with the FairTax that its supporters tend to dismiss or downplay. Here are a few.

The true rate is not really 23 percent. Thought of the way people think of state retail sales taxes, the rate is actually 30 percent. The 23 percent figure is derived this way. On a $1 purchase, the tax would be 30 cents for a total price of $1.30. Since the 30 cent tax is 23 percent of $1.30, FairTax supporters argue that the true tax rate is 23 percent. Nonsupporters are more inclined to think that this is just a trick to make the tax rate appear lower than it really is in order to increase support for the FairTax.

Another oddity is that the FairTax would apply to all government spending, including federal spending, as well as private spending. This will undoubtedly force state and local governments to raise their taxes. And it serves no logical purpose for the federal government to tax itself.

The FairTax would apply to new home sales as well as rent. And of course, mortgage interest and local property taxes would not be deductible because there would be nothing to deduct them from.” …

…”FairTax supporters argue that the prices of all goods and services will fall by about as much as the 23 percent tax that would be imposed because of the elimination of existing federal taxes. It is all a wash, they say. As prominent FairTax advocates talk show host Neal Boortz and former Rep. John Linder explain:

 Once the FairTax takes effect, you’ll be receiving 100 percent of every paycheck, with no withholding of federal income, Social Security taxes, or Medicare taxes – and you’ll be paying just about the same price for Tshirts and other consumer goods and services that you were paying before the FairTax.

 The principal documentation for this assertion appears to be a paper commissioned by Americans for Fair Taxation by Harvard economist Dale Jorgenson that is unavailable on its web site or anywhere else as far as I can tell. Although it is often implied by FairTax supporters that Prof. Jorgenson supports their proposal, this is not the case. He has his own tax reform plan that bears no resemblance to the FairTax.

Jorgenson has also been publicly critical of the FairTax. In 2007, he called it ‘reform by focus group.’  In 2008, Jorgenson said, ‘The main weakness of the FairTax is its comprehensiveness. It tries to roll everything into one tax, which simply can’t carry all that weight.’  He has also testified before this committee that a national retail sales tax would need a rate of 40 percent to equal all federal revenues.

And in a 2005 academic article, Jorgenson said, ‘The very high tax rate of the national retail sales tax provides powerful incentives for tax evasion and renders effective tax administration difficult.’”…

…”FairTax supporters have always glossed over the huge incentive for evasion once the existing machinery of tax compliance is abolished and all federal revenues are collected at exactly one point: retail sales. This is a key reason why the Reagan administration rejected the idea. In its 1984 tax reform report it said, ‘A federal retail sales tax, when combined with the retail sales taxes levied by most states, would provide irresistible inducement to tax evasion at the retail level.’”…

 http://waysandmeans.house.gov/UploadedFiles/Bartlett_Testimony.pdf

Dadash, Uri & William Shaw, “Competitiveness: The Great American Distraction,” VoxEU.org, 06/28/11

“Insofar as the US structural current-account deficit reflects inadequate savings – as it clearly does – reducing it is desirable. Doing so efficiently requires that policymakers focus on fiscal reforms that not only reduce the budget deficit directly but also make public spending more effective and nudge the private sector toward producing more exports and reducing imports.

Three types of tax reforms clearly meet these criteria: increased gasoline taxes, a value-added tax, and a phased-in elimination of the mortgage interest deduction.

The US has held its federal gasoline tax at 18.4 cents per gallon since 1994, while other OECD countries have instituted much higher rates. Raising the US gas tax would directly improve the fiscal deficit – raising the tax to only half the OECD average could generate approximately 1% of GDP – and it would help reduce the current-account balance, as oil imports fall. Because the disposable income of consumers would decline, other imports and consumption could decrease as well. Over time, renewable energy sources, alternative means of commuting (including telecommuting), changes in residence or work location, and more efficient cars will mitigate the effect of the initial rise in gasoline prices. The gain in tax revenues will also be smaller as Americans adapt by consuming less gasoline.

A value-added tax (VAT) could also reduce the fiscal and current-account deficits. The CBO estimates that applying a 5% VAT to most goods and services in 2013 would raise $180 billion (1.2% of GDP) that year and $2.5 trillion through 2021 (1.4% of GDP over the period) (CBO 2011). Meanwhile, charging VAT on imports while rebating VAT payments to exporters, a universal practice, would strongly tilt incentives in favor of exporters. At the same time, introducing the VAT could increase the efficiency of the tax system (Hufbauer 2011) and would require limited administrative resources for enforcement, as firms purchasing inputs have an incentive to ensure that sellers fully state their VAT payments. Finally, a VAT could increase household savings by taxing all consumption goods and allowing households to earn interest on savings free of VAT.

The mortgage interest tax deduction, on the other hand, must be gradually eliminated to reduce the deficit. It will cost an estimated $100 billion in 2011 and artificially encourages spending on and investment in real estate, a highly volatile sector. Eliminating the subsidy would help direct savings to more stable assets, reduce individuals’ reliance on household equity to finance consumption during booms, and improve income distribution (subsidizing home purchases disproportionally benefits the rich, who typically buy houses, over the poor, who typically rent). It would also free resources for investment in internationally-competing sectors.”

http://temporaryaddress.voxeu.org/index.php?q=node/6697

KPMG Compiled VAT Articles, Tax Notes, 10/19/09 – 04/25/11

“The integration of the global economy is also encouraging the spread of VAT. For example, a VAT is being used in some instances to replace revenue lost as a result of tariff cuts required under World Trade Organization agreements. Also, when reviewing funding applications from developing countries, the International Monetary Fund often requires the existence of a VAT.”

“Fiscal stability and growth. Many commentators have observed that a VAT is capable of raising significant amounts of revenue relatively easily.  This is due in part to the broad base on which a VAT is generally imposed.  Unlike typical retail sales taxes, a VAT usually applies to an expansive base of goods and services. Further, a VAT is viewed as a more stable source of revenue than an income tax. Although income — particularly corporate income — may vary greatly from year to year, causing a drastic variation in income taxes collected and reducing the accuracy of revenue forecasts, a VAT is imposed on consumption, a more stable base.  And because a VAT is imposed on household consumption rather than on savings, investments, or business inputs, it may have less influence on capital formation, investment, and job creation than income-based taxes, thus encouraging fiscal growth.”

http://www.kpmginstitutes.com/taxwatch/insights/2011/pdf/vat-compilation.pdf

Kocieniewski, David, “U.S. Business Has High Tax Rates but Pays Less,” The New York Times, 05/03/11

“The paradox of the United States tax code — high rates with a bounty of subsidies, shelters and special breaks — has made American multinationals “world leaders in tax avoidance,” according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. This has profound implications for businesses, the economy and the federal budget…”

“…In addition to being complex and uneven, the United States corporate tax code is inefficient and has become a diminishing source of revenue. Corporate taxes accounted for about 9 percent of all federal revenue in 2010. At $191 billion, they were equal to 1.3 percent of the nation’s gross domestic product. Most industrial countries collect more from companies, about 2.5 percent of output. Only a portion of that disparity can be explained by the many types of businesses in the United States that elect to be taxed at an individual rate.

‘Whether the test is fairness or efficiency, the U.S. system gets really low marks,’ said Michelle Hanlon, an M.I.T. professor who says the country needs to completely revamp the way it taxes corporations…”

“…Robert A. McDonald, P&G’s top executive, testified before a Congressional committee this year about the need to cut the United States tax rate without ending tax breaks and shelters. “We need a tax system that addresses today’s hypercompetitive global marketplace,” Mr. McDonald said, arguing that the playing field was tilted away from American businesses.”…

“…No one is certain how much creative accounting costs the federal government in lost revenue, but most estimates say it easily exceeds $50 billion a year. Targeted tax preferences, which Congress created to intentionally benefit specific companies or industries, cost an estimated $100 billion more a year.”

http://www.nytimes.com/2011/05/03/business/economy/03rates.html?src=me&ref=business

 

 

Hufbauer, Gary Clyde and Woan Foong Wong, “Corporate Tax Reform for a New Century,” Policy Brief, Peterson Institute for International Economics, April, 2011

“In his State of the Union address, President Barack Obama stressed four ingredients of American prosperity: faster innovation, better education, less deficit, and more jobs. As the president recognized in his address, the US free enterprise system drives the private sector to innovate, invest, and create jobs. This policy brief concentrates on how reforming the corporate tax system can strengthen the private sector, thereby spurring both innovation and jobs.

Since any change in the tax system potentially affects the federal deficit, we start by summarizing a fact that everyone knows: The US budget outlook is a fiscal disaster. We conclude with a prescription for fiscal sanity that is entirely consistent with corporate tax reform—namely a broad-based consumption tax.”…

“When Japanese, European, or other non-American MNCs export goods and services from their home territory, those sales enjoy a rebate of VAT or goods and services tax (GST).  Likewise, when non-American MNCs ship goods manufactured abroad back to their home countries, the imports must pay the home country VAT or GST.

At a typical rate of 15 percent, a VAT or GST is essentially equivalent—in terms of altering the price of traded goods and services relative to nontraded products—to an exchange rate devaluation of 15 percent. Since the United States so far has resolutely rejected the VAT or GST, American MNCs do not enjoy these tax incentives for exports and home production.”…

“Five anti-VAT arguments are often voiced in the public debate: first, its regressive character; second, its intrusion into revenue sources that have historically been assigned to the states; third, its role as a facilitator of excessive government spending; fourth, the prospect that the VAT or GST will acquire a “jagged profile” over time; and fifth the administrative burden of a new tax.

Briefly we rehearse answers to each of these arguments. Yet in the end a national consumption tax will be adopted by the United States, if at all, only when public finances are in peril and only when it is generally accepted, to paraphrase what Winston Churchill said about democracy, that “[VAT is] the worst form of tax except all the others that have been tried.”…

“A national consumption tax fits Winston Churchill’s axiom. We recognize that many members of Congress and large segments of the public violently oppose a national consumption tax. Their arguments are strong but equally strong are the answers that can be put to their objections…(O)rganized labor rightly acknowledges that most US competitors have VAT systems, which favor exports. Without substantial new tax revenue of the magnitude that a VAT system could deliver, the United States must either sharply raise individual and corporate incomes taxes or rely on draconian budget cuts, much deeper than a large majority of Americans will support. These alternatives are highly implausible. The United States shares the federal spending habits of other advanced economics, and these habits are deeply ingrained, but the United States remains the only OECD country that has not implemented a national consumption tax. Circumstances compel the United States to join up.”

 

http://piie.com/publications/interstitial.cfm?ResearchID=1811

Graetz, Michael J., “VAT as the Real Key to Tax Reform,” The TaxProf Blog, 02/28/11

“Combining a VAT with major reform of corporate and indi-
vidual income taxes would permit us to achieve whatever
revenue and distributional targets our political process deter-
mines to be appropriate. Reforming our income taxes does not
preclude Congress from dedicating an amount of VAT revenue to
funding specific expenditures, such as healthcare. And changes
like these can be phased in on a timetable appropriate to our
economic circumstances at the time of enactment. In contrast,
simply adding a VAT to our existing tax system to address the
need for more revenue would waste a once-in-a-lifetime oppor-
tunity for real and lasting income tax reform.”
This is an excerpt from one of 26 commentaries on VAT published by The TaxProf Blog.
http://taxprof.typepad.com/taxprof_blog/2011/02/the-vat-reader.html

Simon Johnson, “Does the U.S. Really Have a Fiscal Crisis,” Economix Blog, The New York Times, 02/25/11

“…(O)ur tax system is completely antiquated. For the same level of tax revenue relative to G.D.P., we could greatly reduce the distortions (e.g., disincentives to work) just by modernizing. The right and the left agree that we should tax consumption more and income less, but neither is willing to make any kind of meaningful move toward a value-added tax (VAT).

The right seems afraid that this tax will be too effective and power an expansion of government. The left thinks a VAT is inevitably regressive (imposing more burden on poorer people), despite all the evidence that the impact of VAT depends on how it is designed — because you can choose what gets zero taxes (e.g., baby clothes) and high taxes (e.g., yachts).

The only room for bipartisan consensus here seems to be what we got in December 2010 — a big tax cut. Cutting taxes is nice, but only if it is consistent with keeping the budget on a sustainable path.

How does the Republican initiative to cut spending fit in with these budget issues? Not very much is the generous answer. The Republicans’ proposed cuts at the federal level are for discretionary nonmilitary spending, but this is small as a percentage of the budget (and therefore of the economy).

But the problem here is bipartisan — as it was with the tax cut last year. None of the leadership on either side is willing to talk openly about how our biggest banks caused great fiscal damage. No one is willing to explain why our health care costs continue to rise. And no top politicians currently champion real tax reform.”

http://economix.blogs.nytimes.com/2011/02/24/does-the-u-s-really-have-a-fiscal-crisis/?ref=business

Lindsey, Lawrence B., “The Budgetary Case for Fundamental Tax Reform,” testimony before the Senate Budget Committee, 02/02/11

The third major problem with our income based system is that it encourages economic activity to go abroad. An item that is manufactured in China but purchased in America has a cost structure that involves no U.S. income or payroll taxes on its labor content and virtually no U.S. corporate tax on the capital involved in the production. Of course China does have an income tax, but it is quite low compared to ours. The Chinese Individual Income tax produces revenue equal to just 1.2 percent of GDP compared to roughly 7 percent in the United States. The largest component of the Chinese tax system is the Value Added Tax, which generates roughly one third of all Chinese tax revenue. But Value Added taxes are rebated on exports, so this tax does not apply. Conversely, an item built in America and then sold to China involves labor costs that pay both income and payroll taxes and capital costs that involve the whole panoply of U.S. taxation. When they arrive in China the import cost is subject to Chinese Value Added Tax. And this is not just the Chinese. Throughout Europe Value Added Taxation has increasingly replaced direct taxation on personal and corporate incomes over the last couple decades and under World Trade Organization rules it is perfectly legal for them to rebate the tax on exports and impose it on imports.

We complain a lot about the advantages the Chinese give themselves through
manipulation of their exchange rate. At the same time we induce this massive self inflicted wound on ourselves in the form of our income based tax system. And whenever someone advocates raising rates within our current tax regime they are implicitly calling for these distortions to be larger and therefore for Chinese goods to become even more competitive here and our goods to become even less competitive overseas.
http://budget.senate.gov/democratic/testimony/2011/Lindsey_Senate_Budget_2_2_2011.pdf