How Could We Improve the Federal Tax System?

The value-added tax (VAT) is a relatively new tax. It was designed by two people, independently, in the early 20th century. To Wilhelm Von Siemens, a German businessman, the VAT was a way to resolve the cascading problems that arose in implementing gross turnover taxes and sales taxes. To Thomas S. Adams, an American, the VAT was a better version of the corporate income tax.

In practice, governments have implemented the VAT largely as an improved sales tax. European countries, for example, have largely used the VAT to reduce or eliminate other sales taxes. They continue to maintain separate corporate income taxes.

Many European countries enacted a VAT in the 1960s and 1970s. Developing countries followed in the 1980s and thereafter. Sijbren Cnossen, a leading VAT expert from Maastricht University in the Netherlands, called its spread “the most important event in the evolution of tax structure in the last half of the 20th century” (1998).

US policymakers have found it tempting to consider the VAT, but no one seems to be able to muster the courage to call it by its real name. In recent years, VATs have been proposed by current House Speaker and former Republican vice presidential nominee Paul Ryan (who called it a “business consumption tax”), libertarian Kentucky senator Rand Paul (as part of his “Fair and Flat Tax”), Republican presidential candidate Herman Cain (one of the 9s in his “9-9-9” proposal), Senate Finance Committee Democrat Ben Cardin (who called it a “progressive consumption tax”), and the Bipartisan Policy Center’s Domenici-Rivlin 2010 commission report (as a “deficit reduction sales tax”).