“In his State of the Union address, President Barack Obama stressed four ingredients of American prosperity: faster innovation, better education, less deficit, and more jobs. As the president recognized in his address, the US free enterprise system drives the private sector to innovate, invest, and create jobs. This policy brief concentrates on how reforming the corporate tax system can strengthen the private sector, thereby spurring both innovation and jobs.

Since any change in the tax system potentially affects the federal deficit, we start by summarizing a fact that everyone knows: The US budget outlook is a fiscal disaster. We conclude with a prescription for fiscal sanity that is entirely consistent with corporate tax reform—namely a broad-based consumption tax.”…

“When Japanese, European, or other non-American MNCs export goods and services from their home territory, those sales enjoy a rebate of VAT or goods and services tax (GST).  Likewise, when non-American MNCs ship goods manufactured abroad back to their home countries, the imports must pay the home country VAT or GST.

At a typical rate of 15 percent, a VAT or GST is essentially equivalent—in terms of altering the price of traded goods and services relative to nontraded products—to an exchange rate devaluation of 15 percent. Since the United States so far has resolutely rejected the VAT or GST, American MNCs do not enjoy these tax incentives for exports and home production.”…

“Five anti-VAT arguments are often voiced in the public debate: first, its regressive character; second, its intrusion into revenue sources that have historically been assigned to the states; third, its role as a facilitator of excessive government spending; fourth, the prospect that the VAT or GST will acquire a “jagged profile” over time; and fifth the administrative burden of a new tax.

Briefly we rehearse answers to each of these arguments. Yet in the end a national consumption tax will be adopted by the United States, if at all, only when public finances are in peril and only when it is generally accepted, to paraphrase what Winston Churchill said about democracy, that “[VAT is] the worst form of tax except all the others that have been tried.”…

“A national consumption tax fits Winston Churchill’s axiom. We recognize that many members of Congress and large segments of the public violently oppose a national consumption tax. Their arguments are strong but equally strong are the answers that can be put to their objections…(O)rganized labor rightly acknowledges that most US competitors have VAT systems, which favor exports. Without substantial new tax revenue of the magnitude that a VAT system could deliver, the United States must either sharply raise individual and corporate incomes taxes or rely on draconian budget cuts, much deeper than a large majority of Americans will support. These alternatives are highly implausible. The United States shares the federal spending habits of other advanced economics, and these habits are deeply ingrained, but the United States remains the only OECD country that has not implemented a national consumption tax. Circumstances compel the United States to join up.”

http://piie.com/publications/interstitial.cfm?ResearchID=1811