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What a Federal Consumption Tax Would Mean for America

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(C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. What a Federal Consumption Tax Would Mean for America VAT_cover.indd 1 1/31/2011 6:10:19 PM (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. Whether you’re looking for the latest tax news headline or an in-depth analysis of a recent treaty, you can always turn to the leading tax policy and news source. You’ll discover Tax Analysts has the timely, accurate and comprehensive information you ® need. To see why experts rely on us, please visit taxanalysts.com. taxanalysts SM Tax Notes Today® L State Tax Today®L Worldwide Tax Daily® The experts’ experts. VAT_cover.indd 2 1/31/2011 6:10:20 PM (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. THE VAT READER What a Federal Consumption Tax Would Mean for America (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. Tax Analysts taxanalysts.com Main Switchboard: (800) 955-3444 (703) 533-4400 Customer Service: (800) 955-2444 (703) 533-4600 FAX: (703) 533-4444 President and Publisher: Christopher Bergin Executive Vice President: David Brunori Editor in Chief, Federal: Meredith Stevenson Fath Editor in Chief, International: Robert Goulder Editor in Chief, State: Risa Williams Special Supplement Managing Editor: Cathy Phillips Copy Chief: Betsy Sherman Editorial Staff: Joe Aquino, Mel Clark, Sharonna Datillo, Eben Halberstam, Sonya Harmon, Mick Heller, Tom Kasprzak, Jonathan Kelly, Amy Kendall, Matt Kremnitzer, Cathy Wilson Production Staff: Michelle Heiney, Stephanie S. Wynn Graphic Design: Derek Squires ISSN 0-918255-18-X. Printed in the U.S.A. © Tax Analysts 2011. All rights reserved. Users are permitted to reproduce small portions of this work for purposes of criticism, comment, news reporting, teaching, scholarship, and research only. Any permitted use of these materials shall contain this copyright notice. We provide our publications for informational purposes, and not as legal advice. Although we believe that our information is accurate, each user must exercise professional judgment, or involve a profes- sional to provide such judgment, when using these materials and assumes the responsibility and risk of use. As an objective, nonpartisan publisher of tax information, analysis, and commentary, we use both our own and outside authors, and the views of such writers do not necessarily reflect our opinion on various topics. (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. Contents 7 Martin A. Sullivan Introduction: Getting Acquainted With VAT 15 Kathryn James Exploring the Origins and Global Rise of VAT 23 Sijbren Cnossen A VAT Primer for Lawyers, Economists, and Accountants 52 Alan Schenk Prior U.S. Flirtations With VAT 64 William G. Gale and Benjamin H. Harris A VAT for the United States: Part of the Solution 83 Bruce Bartlett The Conservative Case for a VAT 96 Douglas Holtz-Eakin The Case Against VAT 102 Jane G. Gravelle The Distributional Case Against a VAT 112 Michael J. Graetz VATastheKeytoRealTaxReform 123 Alan D. Viard Responding to VAT: Concurrent Tax and Social Security Reforms 130 C. Clinton Stretch Combining a VAT With Corporate Tax Reform 139 Harley Duncan and Jon Sedon Coordinating a Federal VAT With State and Local Sales Taxes TAX ANALYSTS 5 163 Peter R. Merrill VAT Treatment of the Financial Sector (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. 186 Joel Slemrod Does a VAT Promote Exports? 192 Bert Mesdom VAT and Cross-Border Trade: Do Border Adjustments Make VAT a Fair Tax? 204 Richard T. Ainsworth VAT Fraud and Technological Solutions 224 Mark Houtzager Technology: The Crucial Pillar of VAT Implementation 230 Philip Robinson and Jeffrey Saviano Facilitating Better VAT Compliance 239 Pierre-Pascal Gendron VAT Treatment of Nonprofits and Public-Sector Entities 248 Debra Morris VAT Treatment of Charities and Public Bodies in the United Kingdom 257 Ine Lejeune The EU VAT Experience: What Are the Lessons? 283 Martin A. Sullivan VAT Lessons From Canada 291 Susan C. Morse How Australia Got a VAT 312 Paul Previtera and Brandon Boyle Japan’s Consumption Tax: Lessons for the United States 319 Xu Yan China’s VAT Experience 334 Reuven S. Avi-Yonah The Political Pathway: When Will the U.S. Adopt a VAT? 339 Appendix: Consumption Taxes Around the World 6 TAX ANALYSTS Introduction: Getting Acquainted With VAT (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. By Martin A. Sullivan Martin A. Sullivan is a contributing editor to Tax Analysts. Until recently, most talk about a value added tax in the United States was an academic exercise. Policy experts kept telling anyone who would listen that we could boost our competitive- ness if some form of a VAT was used to replace all, or at least the worst parts, of our clunky income tax. But there was no pressing need for a VAT and no political incentive to undertake the arduous task of orchestrating a major tax reform. But times are changing. Between the 2007 and 2010 fiscal years, the national debt increased from 36 percent to 62 percent of gross national product. And matters are only getting worse. America is relentlessly moving toward the edge of a fiscal abyss. In Wash- ington, while our leaders may talk tough, they are not taking action. To avoid upsetting voters, they are careful not to even hint at spending cuts or tax increases of the size needed to make a real dent in the problem. With no limit on the national credit card, the daily push and pull of politics continues unhindered by the impending crisis. Our system of checks and balances and the usual political gridlock are partly to blame. Also part of the mix is our national mental block about the federal debt. The tough choices that must be made are outside the scope of current political discourse. Our ungainly political system seems incapable of processing our giant financial problem. We require great leaps forward. We are getting baby steps. Nevertheless, time marches on. Our popula- tion is aging. The expense of our healthcare is soaring. Something must give. There are three options. None are pleasant. The first is to do nothing. This would send the finances of the federal government into uncharted territory. Figure 1 shows the trajectory of the federal debt as a percentage of GDP if current policies remain in place. (The trajectory is steeper if the Bush-era tax cuts do not expire.) TAX ANALYSTS 7 INTRODUCTION THE VAT READER 8 TAX ANALYSTS The Do-Nothing Scenario (Net Federal Debt as a Percentage of GDP) 160 146 138 140 131 125 118 120 112 106 100 95 100 91 87 84 80 75 77 80 70 71 72 67 69 62 60 53 We are 40 35 36 37 37 37 36 40 32 34 here 20 0 2020 2015 2027 2021 2001 2008 2003 2005 2022 2000 2007 2002 2014 2004 2028 2006 2023 2017 2012 2024 2011 2018 2013 2025 2029 2019 2009 2026 2016 2030 2010 (C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. party third or domain public any in copyright claim not does Analysts Tax reserved. rights All 2011. Analysts Tax (C) THE VAT READER INTRODUCTION There are two concerns with this journey into the unknown. Unchecked federal deficits gradually weaken the economy as (C) Tax Analysts 2011. All rights reserved. does not claim copyright in any public domain or third party content. government debt absorbs private saving and crowds out capital formation. The other problem is the possibility of a sudden loss of investor confidence in the government’s ability to manage its finances, which could dramatically increase our cost of borrow- ing. The second option is a large reduction in government spend- ing. In the abstract, this is the approach favored by many, especially those from the political right.1 But the popular notion of shrinking the government loses much of its appeal when the discussion moves from the general to the specific. For example, few conservative politicians are willing to endorse cuts in Social Security and Medicare spending, the most obvious targets for reducing government expenditures. The size of the spending cuts needed to level the growth in government debt is startling — about $500 billion annually. That amount far exceeds what can be achieved by eliminating waste, fraud, and pork. Figure 2 shows the composition of projected federal spending for 2020. To level off the debt would require cuts of about 3.6 percent of GDP. In 2020 that would equal about 14 percent of all federal spending. If cuts to Social Security, Medicare, Medicaid, defense, and interest payments are taken off the table, Congress would need to cut all other spending by 60 percent. The major components of ‘‘other spending’’ in Figure 2 include expendi- tures for veterans benefits and services; law enforcement; unem- ployment compensation; food and nutrition assistance; IRS administration; health and human services administration; Social Security administration; education; transportation; agricultural support; international affairs; general science; and space explo- ration. Each of us has our views about what should be cut first, but all can probably agree that spending cuts of that magnitude would present momentous difficulties. 1For example, the Tea Party’s ‘‘Contract From America’’ calls for balancing the budget without tax increases.
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