Friday, April 15, 2005

Is US going for a VAT system?

There is widespread agreement between business and scholars in the US that it is time for a major reform of the tax system. On January 2005, President Bush established the bipartisan Advisory Panel on Federal Tax Reform to recommend options for reform of the tax code. Some of the options under discussion are: (i) a flat consumption tax, (ii) a flat income tax, an add-on value-added tax (VAT), (iii) an income value-added tax (IVAT) with Social Security integration, and (iv) reform of the current income tax.

In fact, it is interesting to note that a growing number of policy analysts and politicians are saying that it may finally be time to consider a value-added tax as part of the US federal revenue system. But are they really going forward with this idea! As a European, I would say that it would be funny to see US adopting a "French Tax Invention" like the VAT.

In the meantime and to help my readers in the background discussion of whether a consumption tax is a good option, I should mention a recently published paper by Joseph Bankman and David A. Weisbach on “the Superiority of a Consumption Tax over an Income Tax”
Here is a short outline:
"Perhaps the single most important tax policy decision is the choice between an income tax and a consumption tax. The topic has been discussed and argued over since at least the time of Hobbes (1651) and Mill (1871) without apparent resolution. Consumption and income taxes both represent substantial sources of revenue in all modern economies. This paper considers the choice between an income tax and a consumption tax focusing on an argument made by Anthony Atkinson and Joseph Stiglitz in 1976 (AS 1976). AS 1976 shows that taxes should be imposed on all commodities at the same rate – taxes should be neutral. For reasons illustrated below, this conclusion implies that a consumption tax is superior to an income tax. AS 1976 has recently attracted substantial attention in the technical economics literature but, perhaps because the arguments are technical, it has yet to receive any attention in the legal literature. Our task here is to explain the intuition behind AS 1976 and explore how applicable the model is to the real world. Our conclusion is that consumption taxes are superior to income taxes. "

Give a look to the paper: “The Superiority of a Consumption Tax over an Income Tax”


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