How Could We Improve the Federal Tax System?

Updated on July 20, 2022

Q.

What would the tax rate be under a VAT?

a.The VAT rate is determined by the amount of income it is expected to generate and the size of the VAT base.

The tax rate will be lower if the revenue target is lower and the tax base is larger.
For the most part, value-added taxes (VATs) are levied at the same rate for all goods and services.

An unweighted 19 percent was the average for the Organization for Economic Cooperation and Development (OECD) in 2019, but it varied widely—by as much as 27 percent when it came to Budapest, the United Kingdom, Hungary, Australia, and Japan—while the lowest rate was only 5 percent when it came to Canada (figure 1).

 

Preferential treatment for particular commodities is common practice when it comes to VATs.

While the goods themselves aren’t subject to sales tax, the inputs used to produce them are nonetheless eligible for tax credits.

Some people pay lower taxes than others. Several commodities and services are given preferential treatment in European Union countries’ VATs. VATs that are only a few years old, like those in New Zealand and Japan, have a lower standard rate applied to a wider range of products and services.

In order to meet a certain revenue objective, the lower the tax rate will be if the tax base is broad enough.

An estimated $356 billion in gross income could have been generated by the United States in 2012 if a 5% VAT had been applied to the wide base of all consumption, excluding spending on education and Medicaid and Medicare; charity organizations; or state or local government. This amount of money would be equivalent to around 2.3% of GDP. A narrower base that excluded housing consumption, food consumed at home, and private medical expenditures (out-of-pocket charges and insurance premiums) would have generated revenues of $221 billion, or 1.4 percent of GDP, if the same 5 percent rate was applied on the entire population.

Data Sources

Organization for International Cooperation and Development. “VAT/GST: Standard and Any Reduced Rates (2019).” ”

Further Reading

“Raising Revenue with a Progressive Value-Added Tax.” William G. Gale, 2020. The Tax Code: Efficient and Equitable Ways to Raise Revenue, 43 – 88. ‘ The Brookings Hamilton Project is located in Washington, DC.

Economic Cooperation and Development Organization, 2016. Inflation and the Consumption Tax in 2016. Organization for Economic Co-operation and Development (OECD)

The Tax Analysts, 2011 What a Federal Consumption Tax Would Mean for America, as Told by the VAT Reader. Tax Analysts is based in Falls Church, Virginia.

And Joseph Rosenberg. To Replace Payroll or Corporate Taxes, Impose a Value-Added tax Center for Tax Policy at Urban-Brookings Institute, in Washington, DC.

the aforementioned Eric Toder and Jim Nunns as well as Joseph Rosenberg. In 2012, “The Implications of Different VAT Bases.”” Urban-Brookings Tax Policy Center, Washington, D.C.