Altshuler, Rosanne, Department of Economics, Rutgers University, Testimony Before the Committee on Ways and Means, Hearing on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

…“A VAT is a type of consumption tax that is similar to a retail sales tax but is collected in smaller increments throughout the production process. This form of consumption tax is part of the tax systems of nearly 150 countries worldwide. All OECD member countries except the United States have VATs. In 2007, revenues generated by the VAT represented almost 19 percent of the total tax revenues of OECD countries and about 20 percent of the total tax revenues of European OECD countries.

Adding a VAT to the U.S. federal tax system could help address the medium and long-term revenue shortfalls forecast for the United States. The VAT is particularly effective in raising substantial amounts of revenue in a relatively efficient manner and has proven to be an administrable tax.

If the U.S. were to adopt a VAT, it could rely on the experience and best practices of other countries in setting up and administering the tax. In addition to these attributes, the VAT has a number of other advantages. First, a portion of the revenues from a VAT could be used to finance reductions in statutory income tax rates. Two tax systems (a VAT and an income tax) with low tax rates may be superior from an efficiency and administration perspective to an income tax system with higher statutory rates. Second, given the size of projected future budget deficits, adding a VAT to our current system to generate revenues for deficit reduction alone would likely have positive effects on economic growth. Third, a pre-announced and phased in VAT might stimulate the economy by encouraging consumption in anticipation of the imposition of the tax.

Finally, while the states are likely to protest, a properly designed VAT may actually help force them to redesign or improve their retail sales taxes.”…

“…The VAT on its own cannot solve the country’s fiscal problems. And introducing a VAT has its own problems.  If we adopted the VAT, we would have to institute some form of rebate to offset its regressivity and make every effort to adopt the broadest possible base. We would need to increase IRS resources for administration and be attentive to a range of compliance issues. But we must recognize that near and long-term fiscal pressures will require that we raise more revenue from our tax system. The VAT is an efficient revenue raiser that is likely to be significantly less damaging to economic growth than increasing personal and corporate statutory rates. After considering the range of issues associated with adopting a VAT, I conclude that the United States may be best served by combining a base-broadening reform of the current income tax system with the introduction of a VAT.”