Commentary: Why the U.S. Should Adopt a Value-Added Tax

Everyone wants tax reform and an end to rising deficits. The VAT is a great solution to both problems.

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Not that the VAT is perfect, either. Many experts consider it to be regressive—that is, it hits poorer people harder than the wealthy, as it takes away a larger share of their income and makes basic necessities more expensive. However, one solution could be to combine the income tax with the VAT.

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"If you add a VAT to the current system, you can offset some of the regressivity with the income tax," says Burman, by making sure that income taxes don't take too much more money away from lower-income Americans.

Likewise, the fact that the VAT taxes consumption has its own economic benefits.

"That's precisely what makes it economically efficient and less damaging to the economy. It means savings and investment are taxed much less than they currently are," says McBride.

There is (Sort of) Bipartisan Support

Prominent Democrats like Nancy Pelosi have voiced support for the VAT in the past. President Barack Obama even mentioned the possibility in 2010, though the White House quickly backed off of his comments.

Meanwhile, while Republicans are the party of lower taxes, they're not entirely opposed to the VAT. GOP presidential contender Mitt Romney also made waves when he told the Wall Street Journal in late 2011 that he might consider a VAT. In fact, the GOP indicated in its 2012 platform that it was open to a national sales tax or VAT...albeit alongside an income tax repeal. Relying upon a VAT to replace income tax could mean a steep tax on basic needs. But combined with income tax reform, it's possible that both parties could eventually get on board, says Burman.

"The compromise might come if more liberal people who think that a robust social safety net is important can compromise with conservatives who want to have a more efficient tax system," he says.

It Can Boost the Economy

Consumption drives the economy, as everyone knows, and increasing taxation would cut into people's pocket money, right? Not entirely true, says McBride. He believes the idea that everyone spending their entire paycheck boosts the economy is flawed. While it creates a short-lived economic high, saving and investing make for longer-term sustainable growth.

"I have less incentive to consume today with a VAT and more incentive to save today and consume tomorrow," he says. "So that's the essence of economic growth, is saving and investing today."

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