8 Oct 2018
The Trump Administration has successfully introduced major income tax reform in the US. There has been significant media coverage of these important reforms which are significantly focused on providing corporate tax relief for large transnational US companies.
But how about reform of consumption taxes — the taxes which apply when Americans purchase goods or services?
As it happens, the US is a striking outlier when it comes to taxing consumption.
In almost all developed economies — and many still developing economies (for example, China) — a Value Added Tax (VAT) is a key part of the public revenue landscape. VAT is called Goods and Services Tax (GST) in many countries but the operating principles are the same.
With a VAT, tax is paid, from the outset, at each point of any production process. A rebate system is built in for each earlier producer within the value-adding chain. Eventually the consumer pays the full VAT upon final purchase. From a public revenue viewpoint, a VAT is very effective. Tax is collected as soon as a production process begins and a VAT is significantly self-enforcing as producers able to claim a rebate report in full to the tax authorities all the relevant cost figures to which the VAT applies.
The US does tax consumption but mainly through a set of old-style single-application State-level retail sales taxes. These vary widely from State to State. They are notably inefficient compared to a VAT and easier to evade.
There has been much debate in the US going back many years about the need to introduce a VAT. Progress has been close to zero. This is not surprising ... Click here to read the full text.