“…If VAT revenue were used to lower the corporate tax rate (i.e., with a partial replacement VAT), the effects of the lower corporate tax rate could benefit many firms. Firms with substantial foreign operations might see their competitive position improve relative to foreign firms, as the U.S. corporate rate becomes more closely aligned with the international norm.
The effects of a VAT on economic performance depend on how the revenue from the VAT is used. A VAT that replaces or reduces the worst features of the income tax could increase economic growth, while the effects of an add-on VAT can be more varied depending on the alternative policies for reducing the deficit.
Many economists have long held that the income tax imposes a drag on the economy by taxing the return to saving and investment. This ―tax penalty‖ on saving and investment could manifest itself in many ways; for example, businesses might provide less equipment to workers or use older technologies and be slower to incorporate new technologies, thereby decreasing worker productivity and their real wages and, ultimately, lowering living standards.
Greater reliance on value-added taxes, or other consumption-type taxes, to fund government can help improve economic performance because consumption taxes do not tax the return to saving and investment. By not taxing the return to saving and investment, these taxes reduce the cost of capital and lead to greater investment. Greater investment means more capital formation, and, ultimately, higher labor productivity and living standards than otherwise.
Some estimates suggest that the economic gains from replacing all or a portion of the income tax with a consumption-type tax, such as a VAT, could be significant. One study found that complete replacement of the individual and corporate income tax could increase the size of the economy in the long-run by between 6 percent and 10 percent.
Another study found that replacement of the corporate income tax with a VAT could increase long-run output by 2.0 percent to 2.5 percent…”
“…The United States relies more heavily on income taxes as compared to consumption-type taxes to raise revenue than other major developed nations, even when taking into account state sales taxes in the United States.
One factor that may trigger increased interest in a VAT in the United States is the difficulty of raising substantially more revenue through the current income tax system. Higher tax rates may be problematic because they have been found to be damaging to the economy. A recent OECD study suggests that income taxes are among the least conducive types of taxes to economic growth, which may partly explain the growth of consumption-type taxes abroad.
Among the nearly 150 countries that have implemented VATs, the VATs account for nearly one-fifth of total government revenue. The United States is the only major developed nation without a VAT. (T)he average VAT rate among member nations of the OECD in 2011 was 18.5 percent. Japan has the lowest VAT rate (5 percent), while several countries have combined federal/sub-national rates approaching 40 percent (e.g., Austria, Norway, Sweden).”