Many Democrats oppose a VAT because, like all flat taxes, it disproportionately hurts poorer people who have to spend a bigger chunk of their income on basics. A 25% VAT, for instance, would raise the price of a $5 bottle of shampoo to $6.25, or a $10,000 kitchen renovation to $12,500. The biggest is that it would make most or all of what Americans buy more expensive. Alas, that would come at a huge price: The Cruz plan would benefit the rich, and it would cost the Treasury as much as $3.6 trillion over the next decade.Ī better proposal by Columbia Law School tax expert Michael Graetz would raise the same money as the current system by trading a 12.9% VAT rate for sharply lower income tax rates, while slashing the corporate tax by more than half.ĭespite the strong case to be made for a VAT, there are good reasons why the U.S. Cruz’s proposal, for example, would set an effective VAT rate of almost 19%, while ending the payroll and corporate taxes and reducing income taxes to a flat 10% for everyone. Plus, there’s an enticing tradeoff: Depending on the rate, a VAT would allow policymakers to cut or eliminate the income tax, the corporate tax or payroll taxes. And a VAT wouldn’t touch saving and investment income, boosting capital for American businesses. A pure VAT could have few of the exemptions, loopholes or deductions that force millions of Americans to hire someone to prepare their returns.

Rand Paul, R-Ky., who dropped out of the presidential race Wednesday. Texas Republican Ted Cruz, winner of the Iowa GOP caucuses, is proposing a VAT variation that he calls a 'business flat tax.' Also promoting VAT plans are Sen. Now, though, in part because it’s campaign season, and partly because deficits are set to explode again as Baby Boomers retire, the VAT is back. In 2010, the Senate voted 85-13 for a non-binding resolution that damned the VAT as an awful idea with no place in America. tax code such a mess.īut getting Congress to back a new tax is like trying to get Donald Trump to stop tweeting insults at his rivals, and the proposal quickly became toxic. The VAT is a kind of national sales tax used by virtually every other nation in the world because it can raise lots of money with little of the complexity that makes the U.S. When the federal budget began running annual deficits topping $1 trillion during the Great Recession, economists and politicians worried about the national debt began calling for a value-added tax, or VAT.

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