Carroll, Robert, Ernst & Young, LLC’s Center for Tax Policy, “Considerations for a Value-Added Tax in the United States,” Testimony before the Ways and Means Committee, July 26, 2011

“…If VAT revenue were used to lower the corporate tax rate (i.e., with a partial replacement VAT), the effects of the lower corporate tax rate could benefit many firms. Firms with substantial foreign operations might see their competitive position improve relative to foreign firms, as the U.S. corporate rate becomes more closely aligned with the international norm.

The effects of a VAT on economic performance depend on how the revenue from the VAT is used. A VAT that replaces or reduces the worst features of the income tax could increase economic growth, while the effects of an add-on VAT can be more varied depending on the alternative policies for reducing the deficit.

Many economists have long held that the income tax imposes a drag on the economy by taxing the return to saving and investment. This ―tax penalty‖ on saving and investment could manifest itself in many ways; for example, businesses might provide less equipment to workers or use older technologies and be slower to incorporate new technologies, thereby decreasing worker productivity and their real wages and, ultimately, lowering living standards.

Greater reliance on value-added taxes, or other consumption-type taxes, to fund government can help improve economic performance because consumption taxes do not tax the return to saving and investment. By not taxing the return to saving and investment, these taxes reduce the cost of capital and lead to greater investment. Greater investment means more capital formation, and, ultimately, higher labor productivity and living standards than otherwise.

Some estimates suggest that the economic gains from replacing all or a portion of the income tax with a consumption-type tax, such as a VAT, could be significant. One study found that complete replacement of the individual and corporate income tax could increase the size of the economy in the long-run by between 6 percent and 10 percent.

Another study found that replacement of the corporate income tax with a VAT could increase long-run output by 2.0 percent to 2.5 percent…”

“…The United States relies more heavily on income taxes as compared to consumption-type taxes to raise revenue than other major developed nations, even when taking into account state sales taxes in the United States.

One factor that may trigger increased interest in a VAT in the United States is the difficulty of raising substantially more revenue through the current income tax system. Higher tax rates may be problematic because they have been found to be damaging to the economy. A recent OECD study suggests that income taxes are among the least conducive types of taxes to economic growth, which may partly explain the growth of consumption-type taxes abroad.

Among the nearly 150 countries that have implemented VATs, the VATs account for nearly one-fifth of total government revenue. The United States is the only major developed nation without a VAT.  (T)he average VAT rate among member nations of the OECD in 2011 was 18.5 percent. Japan has the lowest VAT rate (5 percent), while several countries have combined federal/sub-national rates approaching 40 percent (e.g., Austria, Norway, Sweden).”

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.”



Graetz, Michael J., Professor of Law, Columbia Law School, Statement At a Hearing of the House Ways and Means Committee on Tax Reform and Consumption-Based Tax Systems, July 26, 2011

“…It is the central contention of my book, and the centerpiece of my proposal, that the fundamental reform required to create an internationally competitive, administratively efficient, and viable long-term solution to our funding requirements is to make a different choice.  We should eliminate the income tax for the overwhelming majority of Americans and replace it with a broad-based tax on sales of goods and services. We should return the income tax to its original, manageable purpose: the collection of a simpler tax on high-income earners who tend to have multiple income sources. And we should dramatically lower our corporate income tax rate. In order to do that, we need to tax consumption, sales of goods and services.”…

“…For those unfamiliar with my Competitive Tax plan, it has four key pieces:

• First, enact a value added tax – a broad based tax on sales of goods and services now used by more than 150 countries worldwide.  We are the only OECD country that does not have a VAT or, as it is sometimes called, a goods and services tax.

 • Second, use the revenues produced by that consumption tax to finance an income tax exemption of $100,000 of family income and to lower substantially the individual income tax rate on income above that amount.

 • Third, lower the corporate income tax rate to 15%, or at most 20%.

 • Fourth, replace the earned income tax credit and provide low and middle income families with tax relief from the VAT burden through payroll tax offsets and debit cards….”

 “…Opponents of value-added taxes often complain that they are regressive, and if such a sales tax were to fully replace our income tax, as proponents of the so-called Fairtax urge, tax burdens would indeed be shifted down the income scale.  So I designed my Competitive Tax Plan in a manner generally to change neither the progressivity of the tax system nor the amount of revenue produced under current law.  This allows my proposal to be evaluated by comparing it directly to the current system, and it follows the important precedent of both distributional and revenue neutrality that facilitated enactment of the 1986 Tax Reform Act, our last major tax reform…”

“…A great advantage of my Competitive Tax plan is that, by introducing a border-adjustable value added tax on sales of goods and services and thereby decreasing our nation’s need to rely so heavily on the income tax to finance our government’s spending, we can have a tax system that is fair and yet substantially more favorable to economic growth than our current system…”