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

Updated on July 20, 2022

The future of the tax system in the United States is currently the subject of heated debate in Washington, D.C. In instance, the GOP “Better Way” tax reform plan proposed by Ways and Means Chairman Kevin Brady includes the DBCFT and border adjustability, two crucial components.

To some extent, the arguments in favor of and against the GOP tax plan are reminiscent of those made when Washington was considering implementing a value added tax (VAT) in the 1970s.

Tax Foundation’s “A Value-Added Tax for the United States?” in 1979 was an excellent primer on the VAT’s various difficulties. According to this research, there is a strong case for and a strong case against a sales tax (VAT). In the current debate over the DBCFT and border adjustability, many of same arguments are being used.

Widespread agreement can be found in a wide range of academic studies on the benefits and drawbacks of broad-based federal taxes like the VAT.

The VAT is said to provide the following benefits:

Consist of a steady stream of sales driven by consumer demand

“Neutral” because businesses of all sizes and industries would be forced to comply;

Give companies more reasons to keep costs under control.

Save money, or at the very least, don’t discourage it.

High-yielding investments with a low effective tax rate;

Ensure that it is easy to use;

Streamline exports, provided certain conditions are met;

Contribute to the establishment of a more equitable system of taxation.

The purported disadvantages stand in stark contrast to these beneficial attributes. The VAT, it is said, would:

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Be backwards; go backwards.

Excessive expenditure can occur as a result of this.

Countercyclical equilibrium is lacking;

Pose a risk to small and emerging businesses;

Increase the burden on administration

Inflationary pressures will be set off.

The “hidden tax”;

Controversy with current state and local sales tax patterns;

In many cases, be unable to provide effective export incentives.

Despite its staleness, the study is nonetheless well worth perusing.


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