Saturday, February 12, 2011

Value Added Tax?

As our class has shown us, budgeting offices all over the country are probably running out of red ink. The country faces a number of tough decisions over the coming decades on how it chooses to deal with a series of pressing fiscal questions. There are a number of challenges that we face from an aging population to large trade deficit. These issues are making the call for a revamped tax structure louder and louder. Many are now calling for a value added tax. It does basically what it says, every time someone adds value to a product (Making wood into a table) it gets taxed.

The value added tax is used by nearly every single developed country on Earth, except for the U.S. These countries like it because the management of a value added tax is relatively easy. Members along the supply chain hold each other accountable to paying their share so that one entity doesn’t have to pay all tax obligations. However, there are a lot of people that don’t like it because the structure can be quite regressive as it is a consumer driven tax. In left leaning circles this problem is addressed by lowering income tax obligations on lower wage earners to offset the potential downside.

People on both sides of the political isle agree that our tax system is in desperate need of an overhaul. The tax code has gigantic loopholes that incentivize organizations to spend time and energy finding ways to reduce their tax obligation. It prevents companies from competing equitably with one another in the market. Our overall tax structure is one of the lowest in the world but the graph below shows that we are simultaneously taxing business investment at a high rate. This can reduce incentives for companies to invest, which can be quite inefficient towards driving economic development (Graph below). A value added tax could help drive innovation by removing barriers to entry brought on by poor taxing structure, but potentially raise new concerns.


  1. Nice post! In the week of sales tax, we will have some chance to discuss value-added tax. Would like to hear you share some comments in the class.

  2. Interesting! VAT is the main part of general revenue in China. I am thinking it will be interesting to see some comparisons between China and the US about how much VAT and sales tax can change consumers behavior; whether the behavior distortion of VAT is less than sales tax.