VAT key to raising efficient and prosperous GDP growth and funding – comparatively better than wealth tax

Taking these five considerations into account, the broad-based creditinvoice VAT this chapter proposes would bring to the United States a progressive and growth-friendly version of the revenue source that so many other nations rely upon. America has never had a national broadbased consumption tax of any kind, but the VAT is the world’s most common consumption tax, used by more than 160 countries, including every economically advanced nation except the United States. In 2016, consumption taxes raised just 3.7 percent of GDP in the United States, mainly through state and local sales taxes, compared with 10.5 percent in other OECD countries, mostly through VATs.5

VATs are popular for many reasons. First, and most importantly, VATs raise a lot of money. Asked why he robbed banks, Willie Sutton supposedly said, “Because that’s where the money is” (Federal Bureau of Investigation 2015). As a tax on a broad measure of consumption, VATs are “where the money is” in tax reform. In other OECD countries, VATs are the third largest revenue source, behind social security and personal income taxes.6 A VAT initiated in 2020 at a 10 percent rate would raise $247 billion, or 1.1 percent of GDP, even after funding a UBI that provides families payments equal to the VAT rate times twice the poverty line. Over the course of 2020–29, the policy would raise $2.9 trillion. If a UBI were not implemented, the VAT would raise revenue by a whopping $842 billion in 2020, or about 3.8 percent of GDP.7 The 10-year total is about $10 trillion. The revenue generated by a VAT would provide an enormous pool of resources to address social and economic problems.

Second, VATs are consistent with an efficient and prosperous economy. Future consumption is funded by existing wealth, future wages, or future excess returns on investments. As a result, a consumption tax effectively imposes a one-time implicit lump-sum tax on a broad measure of wealth existing at the time of implementation. Th e burden of this component of the VAT is imposed immediately upon enactment because the value of wealth changes. Th is outcome is easiest to see if the consumer price level, which includes the VAT, rises by the full VAT rate. In that case, existing assets can then be exchanged for less aft er-tax consumption than before the VAT was imposed.8

The burden a VAT places on existing wealth avoids three key pitfalls of a direct wealth tax: Th e VAT’s wealth tax is extremely efficient because it is very difficult to avoid or evade; it does not require explicit valuation of particular assets; and it taxes excess returns, which is not distortionary, rather than taxing all returns, which is. But while this wealth tax is progressive by conventional standards, because the distribution of wealth is skewed toward the top, the burden imposed by the VAT is substantially less progressive than that of a direct wealth tax with a high exemption. While the burden of a VAT on existing wealth is imposed immediately upon enactment through a decline in the purchasing power of existing assets, the explicit tax payments arising from future consumption of existing wealth accrue only over potentially long periods. Still, the present value of long-term revenue from the burden a VAT imposes on wealth is at least equal to—and may well exceed, under plausible assumptions—the 10- year (undiscounted) revenue yield of the wealth tax proposed by Senator Elizabeth Warren.

A VAT also has important efficiency advantages over other types of taxes. Because VATs do not distort saving, investment, or financial decisions, they are more conducive to economic growth than income taxes or wealth taxes are. Because of the unique crediting structure that they employ, VATs are easier to administer and enforce than retail sales taxes. And by using border adjustments that remove taxes on exports but impose taxes on imports, VATs are consistent with other countries’ tax systems and avoid creating distortions in international trade.