Republicans have learned to love value-added taxes
For conservatives, the phrase “value-added tax” once amounted to fighting words. Grover Norquist, the head of Americans for Tax Reform, warned other conservatives in 2010, “Don’t give Obama a VAT.” Such a tax, he argued, would be “an extremely efficient money machine for big government.”
Because VATs embed taxes in the price of goods, Norquist said, they’re typically hidden from taxpayers and thus easy to raise. Adopting one would bring the U.S. closer to the social-democratic states of Europe.
But now a VAT is back on the agenda, and not thanks to Bernie Sanders. The tax is integral to the economic plans of two presidential candidates who want a smaller federal government: Sens. Ted Cruz and Rand Paul. Their surprising support for a VAT shows its appeal, its flaws and its complicated politics.
Perhaps because the concept has been controversial among Republicans, both senators avoid using the phrase “value-added tax.” Paul talks about a 14.5 percent “business activity tax,” and Cruz about a 16 percent “business flat tax.”
In both cases, businesses would be taxed on their gross receipts minus their purchases and capital investments. All investments would be written off immediately under these plans, and businesses wouldn’t be able to deduct wages. That’s what makes them VATs.
Relying heavily on VATs allows European governments to have corporate tax rates that are lower than the U.S. and capital taxes that are competitive with ours while still collecting more revenue (as a percentage of total economic output). Compared with those other taxes, VATs don’t fall as heavily on investment — which makes them a lot more efficient.
And that’s why they’re increasingly attractive to Republican tax reformers. The Tax Foundation, a conservative group, has estimated the impact of the Republican presidential candidates’ various tax plans on government revenue and economic growth. The Cruz and Paul plans are said to raise growth by 13 percent or so, which is more than the non-VAT plans offered by Donald Trump and Jeb Bush would do.
The VAT plans are also less of a drain on government revenue. Trump’s plan is said to lose $10 trillion in revenue; Bush’s plan would lose $1.6 trillion. Cruz’s, by contrast, would lose $800 billion, and Paul’s would raise $797 billion. To the extent all these plans aim to stimulate growth, Cruz and Paul offer a bigger bang for the buck.
The flip side of those estimates is that VAT-centered reforms don’t do much to cut taxes directly for average wage earners. Taxpayers making between $29,000 and $35,000 a year get a 1.2 percent increase in aftertax income from Cruz’s plan. Bush’s plan gives them a 2.7 percent boost and Trump’s 5.3 percent.
Value-added taxes pose a trade-off: They make taxes more efficient but less visible. Conservatives have long wanted taxes to be easy to comprehend and thus to resist. Cruz and Paul, in passing over their VATs in silence and omitting any mention of the way their “business” taxes would affect workers and consumers, are accentuating the attractive side of their plans. But they’re also lending credence to the old worry that tax burdens can indeed be hidden.