“Divide on Deficit and VAT,” New York Times, 10/25/10

The big question is whether the Deficit Reduction Commission will have the courage to recommend a value added tax, not as an add-on tax, but as a revenue-neutral replacement for the Corporate Income Tax. Knee-jerk opposition can be expected by those who fear the VAT would be implemented as an add-on tax, but that assumption is not a given for consideration of the VAT.

NO advocate of VAT should encourage introducing an “add-on” tax while the economy is so vulnerable. In fact, as Canada did, and Japan before her, it probably should be introduced with a tax cut! The economy needs stimulus now. Later, after the economy recovers and after all practical spending cuts are made, if we still have to raise taxes, better a consumption tax than an increase in income taxes.

But a strong argument can be made for VAT as a “revenue neutral” replacement for the Corporate Income Tax. It would be stimulative: eliminate a major competitive disadvantage in world trade (because VAT is subtracted from exports and added to imports); incentivize the return of U.S. multinationals’ capital parked abroad in lower-taxed countries; eliminate double-taxation of dividends. A broad-based VAT with no tax preferences would end lobbying for loopholes.