Value-Added Tax Makes A Comeback

Who's afraid of the big, bad VAT?

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The debate over whether the US should follow Europe's lead and adopt a value-added tax has always simmered beneath the surface, but things seem different this time. For one, we have Bruce Bartlett in Forbes saying the "day may finally be here" when the left and right learn to put aside their differences, stop worrying, and just love the VAT.

The right can learn to love it because it's a simple consumption tax that lacks most of the loopholes, exemptions and other Rube Goldberg-esque nonsense that pollute our current tax code, right? Well, this letter to the editor in yesterday's Wall Street Journal strikes back at the idea that the VAT would be so simple:

What the VAT accomplishes, in addition to sucking more money out of the pockets of the "little people," is to inject a legal right for the state to examine, audit, criminalize and punish every transaction that occurs on U.S. soil. The kid who shovels your snow or mows your lawn can be regarded as a tax criminal for not properly accounting for and paying his VAT. Will we see Girl Scout cookie sellers and the local craft person audited and charged financial penalties?

I'm certainly sympathetic to criticisms of the VAT, but I'm not sure if this is the way to go about it. First, every day there are thousands of kids across this country mowing people's lawns, shoveling driveways, etc who never report it as taxable income. I don't see how the IRS is more likely to go after these "tax criminals" under a VAT system than they do currently under our income tax system.

Second, I'm no expert on European tax policy, so I asked a few people if this story of the VAT becoming a major burden to entrepreneurship has been the experience in other countries.

Len Burman of the Urban Institute told me:

The answer is that most VAT systems exempt small retailers and that would include the kid who shovels your snow or babysits for your child.

It's not guaranteed that the US would adopt such an exemption as well. But it seems likely, considering that to make the VAT politically acceptable, it will need to be amended in other ways to make it easier on working-class Americans (ie, a rebate for people under certain incomes).

Ok, so the VAT isn't going to destroy your kid's lemonade stand. But the lawn mowers and snow shovelers would still feel its effects. Burman:

sales from small retailers exempt from VAT could still be partially taxed because the inputs would be subject to VAT tax. So Johnny would have paid VAT on his snow shovel and road salt.

Furthermore The Journal letter's argument might apply to more serious entrepreneurs. In the UK, for example, self-employed people have to register for the VAT if they make above a certain amount. There's a long list of the various goods for which the VAT does and does not apply. So many self-employed entrepreneurs in the UK have a whole lot of invoices they need to remember to collect.

You can say that all of this is still more simple than the system we currently have, and you're probably right. But if the VAT ever comes to America, it's not going to replace the income tax--it's going to be added on top of it. It looks like that move would not only create lots of new tax revenue, but also a whole new, separate set of confusing rules, exemptions and red tape for entrepreneurs to mind.