“The United States is the only nation of any significant size without a VAT. The United States also has the world’s highest corporate tax rate. Those two facts are not unrelated. Despite ever-tightening budgets, governments around the world over the last two decades have steadily reduced their corporate tax rates. How were they able to do this? They made up lost corporate tax revenues by relying more heavily on their VATs…
…For economists this is a no-brainer. The corporate tax–with its arbitrary and excessive burden on the profits of certain businesses–is our most damaging tax. A broad-based consumption tax, like a VAT — which unlike the income tax is not inherently biased against saving and investment — causes the least harm to the economy. Replacing corporate tax revenues with consumption tax revenues is the most straightforward way to improve America’s tax competitiveness. Everything else is just nibbling around the edges.
Of course, that move would make a tax system less progressive. To address this, economists suggest providing rebates to low-income households to make up for their disproportionate burden. Another idea that does not get enough discussion is to simply accept that a more competitive tax system will become more regressive and to use additional VAT funds to expand social programs to help America’s struggling poor and middle class.
It is not the political left, however, that is the main obstacle to the U.S. adopting a VAT. Conservatives are dead set against the idea even though they hate the income tax and at every opportunity seek to reduce taxes on saving. That is because they fear the VAT is a money machine that, once in place, will make it too easy for government to expand to European levels. In contrast, conservatives and business groups outside the United States loudly endorse the expansion of VATs as good replacements for corporate taxes. Whether or not those fears are well founded, we must recognize that as long as we adopt the approach of relying primarily on income and corporate taxes to fund our government–whatever size it is–we are stifling U.S. competitiveness while the rest of the world moves ahead.”