Should the United States Institute a Federal Value-Added Tax? Posner

In the type of VAT that is simplest to understand, the retailer pays the tax, which is a percentage of the difference between the price at which he sells his goods or services and the cost of his labor, materials, and other business expenses (such as rent and insurance). In other words, he is paying tax on the value that he added to the inputs he bought. His suppliers likewise pay the VAT on their sales revenues minus their costs—that is, on the value they added in the production-distribution process.

Because (assuming no exemptions) the tax base for a VAT is so broad—all goods and services—a VAT can generate enormous tax revenues at a low tax rate, which reduces the distortionary effect of the tax. Moreover, a tax proportioned to value added is a reasonable if crude proxy for the government services that a business firm (and hence its customersd) receives. The VAT also avoids the double taxation of savings under a corporate plus individual income tax system, further encourages savings by making consumption more costly, and reduces the disincentive effects of heavy income taxation. The VAT is criticized as regressive, but if the tax rate is low the regressive effect is slight, and in any event could be offset by subsidies for the poor. The VAT is also criticized as inflationary, because it causes retail prices and thus the consumer price index to increase, but the empirical evidence (most nations have a VAT, so there are abundant data for studying its effects) is that at worst the imposition of a VAT causes a one-time blip in the index.

Of course the benefits of the VAT are greatest if it is substituted for income taxes and other inefficient taxes rather than being added to the existing tax system to generate additional tax revenues. (The inflationary effect would disappear if the VAT merely substituted for other taxes that are passed on to consumers.) Not only is such a substitution politically infeasible, but the cost of transitioning from a tax system based on income to one based on value added at the successive stages of production and distribution would be immense.

Becker’s main objection to the adoption of the VAT by the federal government, which is similar to the objection to taxes on Internet sales and indeed any new taxes that do not merely replace existing taxes, is that by increasing government revenues it will increase the size of government relative to the private economy, and if (as is doubtless true) government is less efficient, the result will be a reduction in economic welfare. An efficient tax is less costly and so is likely to be set at a level that generates more tax revenue than an inefficient one; and, as Becker notes, because it is less costly, it is likely to grow more over time than an inefficient tax.

I agree but on the other side of the issue is our awful fiscal situation. Our public debt is soaring at a rate of more than $1 trillion a year, and for political reasons it is extremely unlikely that the debt will be brought under control by higher tax rates, spending cuts (or forbearance to adopt new spending programs), or a rate of economic growth faster than the rate of growth of the public debt. The fact that the dollar remains the strongest major currency, which is why it remains the dominant international reserve currency, is enabling the Treasury to borrow at low rates. But this will not last if we continue on the road of fiscal imprudence; and as interest rates on the public debt rise, compounding the deficit, we could find ourselves in the position that Greece is in.

Devaluation is a standard response to excessive public debt, but would not make sense for the United States: first because foreign trade in not a very large part of our economy, and second and more important because devaluation would greatly impair the international standing of the dollar. Inflation is another standard response to excessive debt, but it would hurt our foreign trade, and the rate of inflation would have to be high because most of our public debt is short term, so that moderate inflation would be largely ineffectual because interest rates on the debt would adjust quickly. But high rates of inflation have negative effects on the economy.

In light of the nation’s fiscal bind, the imposition of a federal VAT becomes a more attractive prospect. One immediate beneficial effect, provided that the VAT was not entirely additive to existing taxes but was coupled with some reduction in corporate and payroll taxes, would be a reduction in export prices and therefore an increase in exports and hence a reduction in our trade deficit, which is a contributor to our public debt. The General Agreement on Tariffs and Trade permits VAT to be rebated on exports, thus lowering the cost to the foreign buyers.

More important, the VAT would increase federal tax revenues with minimal distortion because it is an efficient tax. To the extent (even if modest) that it replaced less efficient taxes, it would increase economic efficiency and thus increase the rate of economic growth.

Most important, by discouraging consumption in favor of savings, a VAT would reduce the interest rate on our public debt and the Treasury’s dependence on foreign lenders.

Comments

[authentic jerseys]

thank you for sharing!
i learn a lot information from this article! i wantto know a lot information like this topic.i will concer it again!

[Visvim]

Your Special Article Wizard page these days is the equivalent of your on-line identity.

[cheap jewelry online]

Thank you for sharing. Very happy to see your article, I very much to like and agree with your point of view. Have a good time.

[Rosetta Stone]

beneficial effect, provided that the VAT was not entirely additive to existing taxes but was coupled with some reduction in corporate and payroll taxes, would be a reduction in export prices and therefore an increase in exports and hence a reduction in our trade deficit, which is a contributor to our public debt. The General Agreement on Tariffs and Trade permits VAT to be rebated on exports, thus lowering the cost to the foreign buyers.

[mbt shoes]

This article is very interesting, I like it. I will always come to visit after.I would recommend to friends more.

[UGGs Outlet]

Then if a 1314different cotton is shipped to us on the order which we give at the

[solar-energy-factory]

This is an amazing piece that kept me reading on the edge of my seat till the end.

[solar-energy-in-china]

Everyone deserve the right to find the right one. Sometimes it just takes time which is pretty precious at some ages.

[solar-collectors-manufacturer]

Thank you everyone for your kind comments. I will catch up with each one of you this evening...I have urgent business in the studio today.

[power strip]

One thing becomes evident upon watching these clips carefully: these three men are angry. They are angry about what was going on in our culture, knew they were in a losing battle, but fought it anyway.

[nfl jerseys]

Very informative article. Thank you.

Hopefully online marketing jobs don't dry up in the wake of this ongoing economic collapse. The Dow dropped, what, 512 points today?! It's starting to feel like 2008 all over again. Ever wonder what's really going on? I think I know.

we sale nfl jerseys: http://www.nflsporter.com

[nfl jerseys]

Very informative article. Thank you.

Hopefully online marketing jobs don't dry up in the wake of this ongoing economic collapse. The Dow dropped, what, 512 points today?! It's starting to feel like 2008 all over again. Ever wonder what's really going on? I think I know.

we sale nfl jerseys: http://www.nflsporter.com

[楽天市場]

[url=http://www.ugg-rakuten.com/]楽天市场[/url] 、恩赦は、任意の時間に製作されたのはいつですか？世界中の多くの人々があるための彼らの政治的understanding.Manyから投獄さ、それらはそれがprison.In多くの国であなたがどのような人を見つけることができるものするときに拷問することができる独自のselves.Thereはそれらの多数あるものを守るために直接に欠けて投獄されるますますcustody.Others内部に撮影された後、ちょうど衰退人は、ちょうどこれが理由でも国際的な行動を求めていることは非常に広いように虐待の国の市場leaders.These品種から発生を雇ったヒットやつのように殺されるために起こる含まれています恩赦が行われる理由なぜ関与するこの人のその権利がprotected.Itはこの恩赦だけでなく、アムネスティエッセンシャル運動が最初にestablished.Thisした作られて、結局、なぜ、なぜかちょうどあなたがcountry.Thisの過剰の責任へと進化しなければならないです。人々はpardon.Many人は恩赦が製造されているとき、チャレンジへのステップを知っておく必要が提示できるように？ 1

[Steroids]

emerge build physique increasing body bodybuilder title hyper building intake muscle bodybuilding bodybuilders weight line main europe protein late 2008.

[ParNja]

http://omnicef250mg.webs.com/apps/blog/show/14766217-omnicef-reviews
what is cefdinir
http://omnicef250mg.webs.com/apps/blog/show/14767682-omnicef-rash-pictures
omnicef prescribing information
http://omnicef250mg.webs.com/apps/blog/show/14767037-omnicef-lyme
omnicef alcohol

[ParZdv]

http://omnicef250mg.webs.com/apps/blog/show/14766583-omnicef-medicine
omnicef strep
http://omnicef250mg.webs.com/apps/blog/show/14766196-cefdinir-interactions
buy omnicef liquid
http://omnicef250mg.webs.com/apps/blog/show/14767721-cefdinir-300mg-capsules
omnicef reactions

[ParQps]

http://omnicef250mg.webs.com/apps/blog/show/14766373-omnicef-flavor
antibiotic cefdinir
http://omnicef250mg.webs.com/apps/blog/show/14766419-what-is-cefdinir-used-for
buy omnicef suspension storage
http://omnicef250mg.webs.com/apps/blog/show/14767603-omnicef-and-coumadin
cefdinir vs amoxicillin

[ParIec]

http://omnicef250mg.webs.com/apps/blog/show/14766736-omnicef-ingredients
red stool omnicef
http://omnicef250mg.webs.com/apps/blog/show/14767456-omnicef-refrigerated
buy omnicef antibiotic uses
http://omnicef250mg.webs.com/apps/blog/show/14766594-omnicef-pregnancy
uses of omnicef

[ParFcs]

http://omnicef250mg.webs.com/apps/blog/show/14766679-what-is-cefdinir-for
omnicef in pregnancy
http://omnicef250mg.webs.com/apps/blog/show/14767437-antibiotic-cefdinir
buy omnicef suspension refrigerate
http://omnicef250mg.webs.com/apps/blog/show/14767776-omnicef-and-side-effects
cefdinir missed dose

[ParTkx]

http://omnicef250mg.webs.com/apps/blog/show/14767338-buy-omnicef-no-prescription
cefdinir susp
http://omnicef250mg.webs.com/apps/blog/show/14766888-omnicef-and-vomiting
omnicef prescription dose calculator
http://omnicef250mg.webs.com/apps/blog/show/14767770-omnicef-and-stool-color
side effects cefdinir