Methodology for Distributing a VAT

The Tax Policy center has developed a new method for estimating the distributional effects among income groups of a broad-based consumption tax, such as a value-added tax (VAT). The new method provides separate measures of the long-run and transitional effects of introducing a VAT. In the long-run, taxpayers bear the VAT burden in proportion to the sum of their labor compensation, transfer payments, and super-normal returns to capital, but normal investment returns would be exempt. In the transition, an additional burden would be imposed on the spend-down of existing wealth, but indexed transfer payments would be exempt.