VAT, cont. [Bruce]

Re Eric's comments:

1. It's not really practical to have a VAT at the state level. One state, Michigan, tried it and eventually repealed it. There are some things that only work at the national level and this is one of them.

2. A tax on value-added is not a tax on profits at all. A company collects and pays the tax whether it's making a profit or running a loss. Since the tax falls on the difference between what a company buys from producers or other companies and what it sells its own output for, a VAT mainly falls on the company's wages; that's what creates the value-added.

3. There is a problem with exemptions from the VAT, but my observation from other countries is that this almost never involves the kind of corporate welfare we have here. The exemptions are mainly enacted to relieve the regressivity of the tax, such as by exempting food. However, all economists recognize that any exemptions create enormous complexity that undermines the VAT's efficiency enormously. It would be highly desirable to have one rate on the broadest possible base and relieve the regressivity by cutting other taxes, increasing welfare benefits or some means other than exempting certain goods and services.

4. I don't like the rebate idea because it would quickly become a de facto entitlement program. But I don't think it would be necessary in my thinking of a VAT as an add-on tax. There will still be plenty of other taxes that could be adjusted to compensate for the VAT's regressivity. If we were talking about a wholesale replacement, which ain't gonna happen, that would be a different matter.

On a final note, I would remind people that every other major country on Earth has a VAT--the U.S. is the sole holdout. This means that there is lots of experience we can draw upon should we go down this route. That's a key reason why I favor a VAT over a national retail sales tax, which has been rejected by every country that ever considered it. Many countries with a VAT had socialist governments when the decision was made. Those on the left can look to these countries for guidance on how distributional problems were handled.