September 21, 2010

The Value Added Tax: Too Costly for the United States

Special Study
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Most developed economies rely on a value added tax (VAT) for a substantial share of their tax revenue, so it is natural for the United States to look at the possibility of implementing a VAT, especially while huge budget deficits are forecast as far out as the forecasts go. While one can debate the merits of a VAT in other countries, the tax is clearly not a good fit for the United States. It would tax a base that has traditionally belonged to state governments, its introduction would bring with it intergenerational inequities, its cumbersome structure would impose large compliance and administrative costs, and it would slow economic growth. Reduced economic growth would diminish tax revenue from all tax bases. This study projects that if the United States introduced a VAT in 2010, its net effect on tax revenue would be minimal by 2030 because VAT revenue would mostly be offset by declines in revenue from other tax bases. Meanwhile, slower gross domestic product (GDP) growth would also mean that government spending as a share of GDP would rise.