The Value Added Tax: Too Costly for the United States

October 1, 2010

The United States is unusual in not having a valued-added tax (VAT), which is one reason the possible adop­tion of a VAT has been a longstanding debate in U.S. tax policy, says Randall G. Holcombe, professor of economics at Florida State University

Most developed economies rely on a 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 not a good fit for the United States for many reasons, says Holcombe.

  • A VAT would tax a base that has traditionally belonged to state governments.
  • Its introduction would bring with it intergenerational inequities and slow economic growth.
  • Its cumbersome structure would impose large compliance and adminis­trative costs.
  • In addition, unlike EU countries, where the VAT is the largest single source of tax revenue, the states of the United States already tax the VAT base with their sales taxes.

The welfare costs of a VAT are substantial, and looking long term, its potential to generate revenue is limited by the negative effects it would have on economic growth.

  • Projections show that adding a VAT of 3 percent to the current tax structure would reduce 2020 gross domestic product (GDP) to 2.1 percent below what it would be without the VAT.
  • Meanwhile, total tax revenue would increase by 1.1 percent of GDP.

Slower GDP growth would also mean that government spending as a share of GDP would rise, says Holcombe.

Source: Randall G. Holcombe, "The Value Added Tax: Too Costly For the United States," Mercatus Center, September 2010.

For text:

http://mercatus.org/sites/default/files/publication/VAT.Special%20Study.%20Holcombe.pdf

 

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