From the Tax Foundation Archives: The Pros and Cons of a Value Added Tax (VAT)

Updated on May 24, 2022

Washington is embroiled in a fierce discussion about the future of the United States tax system. DBCFT and border adjustability are hotly contested issues in the GOP’s “Better Way” tax reform plan, which Ways and Means Chairman Kevin Brady has proposed as a centrepiece.

The arguments for and against the GOP tax plan are identical to those made in the 1970s when Washington was considering a value-added tax (VAT) on goods and services.

The Tax Foundation produced “A Value-Added Tax for the United States?” in 1979, a helpful guide to the VAT debate in the US. The following is an excerpt from the report that summarises the main arguments for and against imposing a value-added tax. How many of them are being used in today’s argument over the DBCFT and border adjustment is interesting.

A thorough review of the available literature reveals broad agreement on the potential benefits and drawbacks of a federal consumption tax with a broad base, such as the VAT.

Claimed advantages for the VAT are that it would:

Because of this, it will have a steady source of income.
It should be “neutral” because it would be applied to all firms.
Increase the financial rewards for companies that keep costs under control.
Savings should be encouraged, not discouraged.
Have the ability to generate significant sums of money at a low tax rate.
Have a straightforward administration process;
Export barriers should be reduced if and when possible.
Help create a more equitable taxation system.

Set against these positive characteristics are the alleged drawbacks. It is contended that the VAT would:

Inflationary tendencies will be set off, new and marginal businesses will be harmed, administrative complications will be created, and new and marginal businesses will be negatively affected.
Be a “invisible tax.”
State and municipal sales taxes may not be able to provide considerable incentives for exporting in many cases.