You want tax reform, America? Try the VAT.

Americans might be persuaded to accept a VAT, or value added tax, if tax reform meant they could eliminate corporate and estate taxes.

Steve Bloom/The Olympian/AP
With tea bags dangling from his protest sign, Jerry Bulla, (center) joins a group of 3,000 fellow anti-taxation demonstrators on the steps of the Legislative Building in Olympia, Wash., on April 15. Americans wouldn't take on a new tax, but they might be convinced to accept a VAT or value added tax in exchange for killing corporate and estate taxes.

There's a lot of chatter about the U.S. adding a Value Added Tax (VAT) to solve its looming fiscal crisis. The Feds need to tax more and spend less to bridge the trillion dollar annual deficits, right? Here's Bob Carroll and Alan Viard in TaxNotes:

Recommendations that a VAT be considered have been more common than outright endorsements of the tax. The idea surfaced briefly as a possible source of revenue for healthcare reform.6 House Speaker Nancy Pelosi, D-Calif., recently commented that ‘‘it’s fair to look at’’ a VAT, and Senate taxwriter and Budget Committee Chair Kent Conrad, D-N.D., has said that a VAT should be on the table in future tax policy discussions.7 Two former Federal Reserve chairs have made similar statements: Paul Volcker has referred to a VAT as a ‘‘possible approach,’’ and Alan Greenspan has said that it must be considered as a possible way to reduce the deficit.8

The fact is the U.S. is the only advanced economy that doesn't have a VAT. Americans have no appetite for adding another tax. But they might just be willing to trade for one. So which tax would the pro-VAT crowd be willing to give up? Corporate is probably the leading candidate, because it raises far less revenue than other major taxes, it is sensitive to recessions (generating half as much during busts as booms), and because it is really bad for growth.

CBO lists these major revenue sources for the federal government in FY 2009:

  • $915 billion ... Individual Income Taxes
  • $891 billion ... Social Insurance Taxes
  • $138 billion ... Corporate Income Taxes
  • $62 billion ... Excise
  • $23 billion ... Estate and Gift

Based on this paper (HT Marginalrevolution.com), a VAT raises revenue at under half its rate in GDP terms, meaning that a 10 percent VAT historically brings in around 4 percent of GDP in revenue. Since corporate income taxes raise 1-2 percent of GDP in the U.S., then a revenue neutral VAT replacement would, I think, be roughly a 4 percent tax on consumption.

But why stop there? Conservatives (and some liberals) hate the estate tax. Offer to eliminate it along with the corporate income tax in exchange for a VAT of 5 percent, and everybody's happy. Right?

But why stop there? If a grand tax bargain is in the works, why not put a serious gas tax on the table? Jim Hamilton tells us that the U.S. consumes 12 billion gallons of gasoline in a typical month. That's a Gross Billion a year (144 for math geeks). A one dollar gas tax would (ceteris paribus) yield $144 billion a year. Make it six bucks a gallon, and you could kill the form 1040 forever. I like it. In fact, I like this little fantasy a lot better than doing my taxes tonight ...

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