The VAT-tariff is one of the major math problems underlying our trade deficit.  Lawmakers are pushed to vote for the Peru FTA even though Peru will continue having the ability to tax our exports to them at 19%.  Weird.  Sad.  Wrong.

It's a big problem.  A solution is necessary, but not easy.  The Coalition for a Prosperous America explains both here.   

Huckabee proposes a consumption tax - he calls it a Fair Tax.  A Value Added Tax is a type of consumption tax.  Huckabee is the only candidate to discuss this.  The discussion must happen now.

Michael Kinsley criticizes the proposal in a WaPo op-ed today. The crux of the criticism is that the consumption tax is just another Republican attempt to hurt the middle class and give tax breaks to the rich.  I've not studied the Huckabee proposal to comment either way.  It is true that progressivity must be maintained for a new tax system.  There is simply too much support for progressivity. 

A U.S. VAT could have a lot of advantages.  I wrote about the issue with Brian O'Shaughnessy of Revere Copper in the Boston Globe. 

The idea of a U.S. VAT is still immature.  But it could solve a lot of our trade deficit problems and have other benefits.  The guiding principle of U.S. VAT exploration should be to shift from income tax to VAT with equal dollars and equal impact on major demographic groups. It should be:

1.   Revenue neutral to the government as compared to the income/payroll tax system.  Another way of saying this is the tax load on the economy should be the same as currently for the switching period;

2.   Tax payment neutral to each major demographic category of business and individual.  The poor, working class, middle class, upper-middle, rich should pay the same tax load as now.  Businesses ditto;

3.   Allow the policy space necessary for future exemptions just like the current system.  Those exemptions and alterations can be smart or stupid, but that is legislative reality.  It is democracy.

We need to eliminate the justifiable objection that somebody is trying to get a windfall from the switch.  Make the switch from taxing income and jobs, to taxing consumption, but the money should be nearly the same. 

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written by levine , December 18, 2007

VAT could be a very good solution to the arcane and constantly abused IRS system we now have. It should not be revenue neutral...the government is subject to the same inflation that people are. What is more important is that the underground ecomomy will finally pay it's share of taxes. As for keeping the same tax load, that would probably not play since lower income people would be paying a larger percentage of their income even though their consumption and therefore their actual taxes paid would be less than that of the affluent.

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