The VAT Tax

A value-added tax (VAT) is a consumption tax. It is not meaningfully different from a sales tax except in the way that it is collected.

Donald Trump is reportedly considering a value-added tax as part of his tax plan. It seems unlikely that such a tax would pass into law given the current Congress. But it’s not a bad idea. In fact, it’s a good idea, which is the opposite of bad.

VATs are common throughout the rich, developed world. Here is how some selected countries break down on their VAT reliance in 2015:

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The US does not have a VAT, but it does have state and local sales taxes. If we bring those in to the picture (and include sales taxes also imposed by the other countries), the picture looks like this:

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No matter how you slice it, it is clear that the US has a lot of room to introduce something like a VAT on the national level. If used to raise revenue to fund good stuff, it would be a helpful complement to the taxes already in place.

Of course, the US lags many of these countries on just about every tax that you can think of. Thus, the US could expand its tax level through other mechanisms as well, including a large increase in income taxes.

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  • Bill

    So how is it good? I’ve always considered it regressive IOW bad.

  • Joe



  • Joe

    No matter how many times you tell your 200K+ readers that spending can’t occur without taxes, it’s not going to make it become true. It’s merely going to keep your 200K+ readers in the dark, and armed with an inferior political strategy to implement big progressive goals. So, keep it up, if you’re cool with that.

  • Mark Fabian

    US dollars are created by the US Government spending them into existence each time it funds bills approved by Congress. The US Government creates dollars by marking up accounts. Dollars are destroyed by marking down accounts. Federal taxes are taken by marking down accounts. Federal taxes cannot and do not fund any Federal spending. They never have.

  • Andrew Leonard

    I’ll admit to being ignorant: What *does* fund spending? “spending can’t occur without taxes” How else would it occur? I’m not being confrontational, I’m genuinely curious and ignorant of other possible methods.

  • Tim P.

    The idea is, as a sovereign issuer of a floating fiat currency, the US, through the combined Fed/Treasury, is not constrained in its operations by revenue considerations. It can, at any time and for any reason, credit accounts i.e. spend. Consider all money currently in circulation was first spent into existence by the government. It does not need to collect taxes to fund projects. Taxes can be thought of as a tool for regulating the price of money and for encouraging pro-social behavior/wealth distribution. So the real constraints are concerns about inflation and price/wage spirals but it could be argued that given current material conditions we are far from bumping into those walls.

  • Ernest Jones

    The federal government creates dollars when it spends. That’s what creates all the dollars we use. We can’t pay taxes until dollars are spent into existence by the government.

  • doe

    I see the possibility but Joe above went further and called taxes “an inferior political strategy to implement big progressive goals”. What evidence is there of this other alternative as a successful political strategy. Which countries with more progressive policies than the US bring them about through this other alternative method?

  • Tim P.

    He’s saying that if the situation is inaccurately framed in terms of the need to collect revenue prior to embarking on projects, then that is essentially a self-imposed handicap on achieving progressive goals. Adopting that view, control of the conversation is needlessly ceded to those on the right concern trolling about deficits.

  • rjmeyers

    It is not fiat. It is tied to the value of assets held and receives feedback via defaults and interest rates on its bond issues. This does not meet the definition of fiat. Issuers of fiat currencies receive no feedback on their spending decisions and eventually blow up because discipline cannot be maintained forever.

    Some discussion of this here (pdf link):

    Do a search for “fiat” and the first hit should be on pg. 25 of the document, which explains briefly how the US shifted from gold to asset-valued money rather than fiat. I wish I could find some other background sources to go into this in more detail, but I am not well-read enough on the subject.

  • rjmeyers

    A lot of MMTers in the comments. The whole “taxes don’t fund spending” they’re pushing is fine, but misses that taxes and spending are coordinated by some sort of external feedback system–either a measuring stick, in the case of gold/silver, or increasing interest rates and default risks in the case of our current system. MMTers propose that we are in a fiat system so all that is required is an act of willpower to balance things out, but this is rarely ever politically possible, and never possible over a medium or long time frame because different factions will take control and be tempted to abuse and crash out the system absent some kind of constraints.

    Gold and silver used to be the measuring sticks, but it became impossible to dig them up fast enough to properly value the economic activity of the middle Industrial Revolution, leading to increasingly terrible boom-bust cycles, ultimately giving us the Great Depression. The New Deal coalition left gold but instead of going to pure fiat was able to tie the US paper money system to the value of the economy itself–the value of assets held. The US government can technically print as much money as it wants, but it faces market feedback on its spending decisions. The US monetary base is roughly tied to the size of the physical assets of the US economy rather than to the rate at which precious metals can be acquired or to nothing.

    Of course, if the markets themselves are dysfunctional and the overall system of trade and finance is increasingly gamed by elites interested in maintaining control over a regressive triangle trade between China, OPEC, and the US and an upward wealth distribution… well, it may start to give the appearance of a fiat system as the usual checks on spending are cast aside in the pursuit of control and power over a slowly collapsing system.


    (pdf link)