Would a VAT work in the U.S. ... now?

• Author: Cheney, Glenn A.
• Position: Value-added tax

Europe does it. So do Japan, Mexico and Canada. Arguments for and against a value-added tax in the U.S. have been going on for more than 35 years. With more than 30 countries doing it, should the U.S. enact a VAT now?

Back in 1991, James P. Bryant, vice president and director of Corporate Taxes for J.C. Penny Co., wrote in Financial Executive: "For over 20 years, I have participated in the debate on a federal value-added tax (VAT) and its viability as the answer to our nation's tax policy woes. Changes in our national and world economies in the late 1980s encouraged the proponents of a VAT to mount yet another charge for the adoption of such a system.

"But I remain resolute: a VAT will not cure the budget and tax ills plaguing this country."

Here in 2009 there are again rumblings of a VAT to help solve the nation's spending shortfall problems. Indeed, as noted in an Oct. 8 editorial in The Wall Street Journal, House Speaker Nancy Pelosi (D-Calif.) was quoted as saying, (when speaking with PBS's Charlie Rose): "Somewhere along the way, a value-added tax plays into this," when referring to the rising possibility of broader tax reform. "Of course, we want to take down the health-care cost, that's one part of it. But in the scheme of things, I think it's fair to look at a value-added tax as well," she added.

One of the simplest and most efficient systems of taxation ever devised, the VAT is, at its core, a consumption tax--but with a twist. It flows through the supply chain, adding to the national treasury as it goes, policing itself along the way and ultimately putting the tax burden on the consumer.

The most tantalizing temptation of a VAT is what it isn't. It isn't an income tax, it isn't a corporate tax and, theoretically, it could reduce or replace either or even both. It sounds simple, and the VAT has been a fixture in nations across the rest of the world for decades. Europe does it, Japan does it, Mexico and Canada do it. But it's also been the subject of ongoing debate within the United States for more than 35 years and past efforts to enact such a tax system have fallen short.

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The VAT has been working quite well in Europe, according to Sabrina Grifat and Jacques Masseca, tax attorneys in Paris with the British law firm Eversheds LLP. Created by a French economist in 1954, the VAT system has been "a great success in France from the very beginning and is imposed on all business activities in the French economy," Grifat and Masseca say. "The VAT contributes a substantial share of the government's revenue (45 percent of French revenues) while remaining neutral for the economic participants."

The economic participants in a VAT system are all the companies in the supply chain, from providers of raw materials to retailers to the final consumer. Businesses collect the tax along the way, each being reimbursed by the next in line.

How it Works

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