Value Added Tax

First, I'd like to make a distinction between a value added tax and sales taxes.  Ultimately all taxes are paid for by us, either directly or indirectly.  A sales tax is added on at the point of sale and because of that is less effective as you almost encourage cheating.

Now of course value added taxes are also subject to cheating but since the people adding them are simply indicating how much the tax should be its much less likely.

Ultimately the VAT tax while identifiable becomes part of the product price, not an add on like sales tax.

The question becomes whether such a tax could replace all other taxes in this country.

The answer is it could but would the rate be so high as to make it politically undoable?

First, all taxes are in fact paid by the citizens.  When businesses are taxed the cost is passed on to consumers or users.

Currently taxes by all branches of Government, Federal, State and Local is around 40% of GDP.

Since each state and municipality would have to decide whether to participate or not it would probably have to take the form of a mandated federal portion with optional add ins by the states.

Federal spending as a percentage of GDP is about 25% so a value added tax for just federal spending would approach that number.

Obviously reducing federal spending would help reduce that obligation, but most federal spending is tied into programs that cant easily be reduced, like Social Security, Medicare and Defense so its likely to remain in that general area.

Now, there are some proposals out there that are similar to this, you can read about one of them here.

Fair Tax

I think a VAT simply works better and wile this makes a big deal about getting rid of the IRS, someone has to collect the taxes, whatever we call them.

It also talks about providing every citizen a prebate equal to the poverty level to make the system more progressive.  This strikes me as a bit of a bureaucratic nightmare and a simpler system would be to simply exclude basic necessities from the VAR like they do in Europe.

There are a lot of advantages to a system based on consumption but the odds of tax reform really making any fundamental changes to our current system are pretty remote.

But it would be nice to simplify it.