Replace Corporate and Personal Income Taxes with VAT

President Obama and his advisers are hinting that they may ask Congress to supplement the existing corporate and personal income taxes with a national Value-Added Tax (VAT) a tax on consumption. The reaction has been quick, venomous and misleading.

Missing in that criticism is any recognition that VAT-based tax discrimination in the global trading system is a major cause of our large and expanding trade deficits and is costing the United States millions of jobs as U.S. based corporations shift their production to countries with a VAT.

Eliminate the existing U.S. personal and corporate income tax system altogether and replace it with a VAT a great tax swap of historic proportions. One argument against such a swap is that it would require the repeal of the 16th Amendment, which is wrongheaded since the 16th Amendment gives Congress the power to levy an income tax, but does not mandate that it do so.
Several VAT critics are also arguing that while the VAT is efficient, fair, and effective, it would, however, raise too much money, too easily and thus encourage the purchase of more public services. They seem to like the existing chaos and inefficiency. And indeed, there is already much about the U.S. Tax Code to hate, not the least of which is its complexity and sheer size a 24-megabyte computer download that fills 7,500 letter-size pages at 60 lines per page.

The administrative compliance costs to the U.S. economy, moreover, are enormous, with the General Accountability Office (GAO) estimating that it consumes approximately one percent of the gross domestic product annually ($145 billion in 2009). The Cato Institute, a Washington-based think tank, estimates that the U.S. "tax army" of accountants, lawyers, and computer experts includes more than 1.2 million tax preparers and processors.

The present system also has vast non-compliance. The IRS estimates that the difference between what taxpayers paid and what they should have paid in 2001 was $345 billion, which was 17 percent of federal revenue that year. Put another way, cheaters evade paying about one of every six dollars of taxes due the federal government.

For many VAT critics, their goal is not to define the method by which the U.S. government raises taxes or to improve its efficiency but to slash revenues as a means of cutting government, or "starve the beast."