A Very, Very Long Uphill Climb for the VAT

How far are we from a value-added tax?

Pretty far. This April, the Senate voted 85-13 for a symbolic resolution that "promised" to never, ever consider a value-added tax (read this Flashcard on the Value-Added Tax). A White House spokesperson said the president "has not proposed this idea nor is it under consideration." But the Wall Street Journal's John McKinnon presses ahead with a smart overview of the tax, anyway. With a bloodbath in 2012 looming, the White House won't have the guts to stage a VAT battle until after Obama's possible reelection, he suggests -- especially since corporations will scream about a new tax on their products.

But there's a way to defend against some of that screaming: tie the VAT to, among other things, reductions in the corporate income tax. This is a good reminder that the VAT, if it ever comes, will not perch itself on top of the tax system like a cherry sundae. It's more likely that it would be swapped in for other tax cuts.

One swap would include a reduction of corporate tax and/or payroll taxes on the employer side in exchange for a VAT at, say, 5%. Introduced as revenue neutral, the tax would rise by a few percentage points when the economy started to heat up.

That's essentially what the Urban Institute's Eric Toder and Joe Rosenberg proposed in this excellent paper on how a VAT/tax-cut combo could effect after-tax incomes. Here's a key chart that examines what would happen if you reduced employer contributions to payroll taxes or corporate taxes by enough to offset the burden of VAT (in the far right column, employer contribution rate falls to 3.5% and maximum corporate tax rate drops to 19.7%):
Effect VAT tax cut swap aftertax income.png
VAT policy aside, the primary obstacle is emotional and political: it's status quo bias. Something big and new like a value-added tax is going to be tough to sell, even if it's wrapped it a box marked revenue-neutral (and, as the chart shows, no change is going to be revenue neutral for everybody). If the VAT does belong to our future, that future is probably no closer than three years away.