EACH POINT ON THE CHAIN
Arguments for Value-Added Tax in the US, and using VAT to fund basic income
The Wall Street Journal lays out the basics popup: yes: “Unlike a traditional sales tax, a VAT is a levy on consumption that taxes the value added to a product or service by businesses at each point in the chain of production.”
VATs are ubiquitous—except in the United States. According to a 2013 Hamilton Project report popup: yes, “In recent years, the VAT has raised about 20 percent of the world’s tax revenue (Keen and Lockwood 2007). This experience suggests that the VAT can raise substantial revenue, is administrable, and is minimally harmful to economic growth.” The TPC notes popup: yes that “every economically advanced nation except the United States” has a VAT. Countries adopted VATs over time: the EU first unified all its VATs in the 1970s, China adopted a VAT in 1984, Canada in 1991, and so on. Now the US is the only country in the OECD without one.
Why is there no VAT in the US?
"Back in 1988, Harvard economist Larry Summers [...] explained popup: yes that the reason the U.S. doesn't have a VAT is because liberals think it's regressive and conservatives think it's a money machine. We'll get a VAT, he said, when they reverse their positions." (Forbes popup: yes.)
A VAT could certainly be a revenue-raising powerhouse. According to the CBO popup: yes, a 5% VAT could raise 2.7 trillion dollars in 2017-2026 with a broad base, or 1.8 trillion with a narrow base—the most massive of all the options for revenue popup: yes in their 2016 report.
And as for the regressive concerns, VAT proposals usually suggest adjusting other taxes or credits commensurately. A 2010 Tax Policy report popup: yes considers a VAT in the context of lowering payroll or corporate taxes, and the Hamilton Project suggests popup: yes adding tax credits or straightforward cash to low-income households.
VATs are appealing beyond their ability to raise a lot of money. They’re also easier to administer and document than other tax forms. A 2014 study popup: yes by Dina Pomeranz examines the way the VAT is documented in Chile, and finds that "forms of taxation such as the VAT, which leave a stronger paper trail and thereby generate more information for the tax authority, provide an advantage for tax collection over other forms of taxation, such as a retail sales tax." Beyond that, Michael Graetz argues popup: yes in the Wall Street Journal, "shifting taxes from production to consumption would stimulate jobs and investments and induce companies to base headquarters here rather than abroad." The Tax Foundation has advocated popup: yes for a VAT to replace the Corporate Income Tax for similar reasons.