In a mildly-worded report, the Urban-Brookings Tax Policy Center and the Economic Growth Program of the New America Foundation examine several prototypes for a VAT to see which ones are “regressive” (putting more of a burden on the poor) or “progressive” (putting more of a burden on the wealthy). The report looks at one version of VAT that would tax just under 80% of consumption and another that would target only 50% by exempting housing, food consumed at home, and medical expenses.

 

Experts concluded the VAT is “roughly proportional at the bottom of the income distribution but regressive at the top, largely because a VAT effectively exempts income from new saving from tax.” But if housing, food and medical expenses are exempted, the VAT would become “slightly progressive” putting more of a burden on wealthier Americans.

 

“But substituting a VAT for a portion of corporate income taxes would make the tax

system less progressive,” reads the report. “Substituting a VAT for equal reductions in payroll taxes and corporate taxes would also make the tax system on balance less progressive because a VAT is only slightly more progressive than a payroll tax, but much less progressive than the corporate income tax.”

 

The report recommends reducing corporate tax in order to encourage investment, but warns that if the top corporate tax rate falls below the top individual tax rate, high-income Americans would look for loopholes to avoid paying taxes by reclassifying their personal income as corporate income.

-Noel Brinkerhoff, David Wallechinsky

 

Effects of Imposing a Value-Added Tax to Replace Payroll Taxes or Corporate Taxes (by Eric Toder, Urban Institute; Joseph Rosenberg, Urban-Brookings Tax Policy Center)

Report: Effects of Imposing a Value-Added Tax to Replace Payroll Taxes or Corporate Taxes (by Eric Toder, Urban Institute; Joseph Rosenberg, Urban-Brookings Tax Policy Center) (pdf)

Replace Corporate Income Tax with VAT: Fritz Hollings (by Noel Brinkerhoff, AllGov)