Income Tax vs. VAT

It is interesting to see that there are still commentators who see the VAT world in black-and-white: if there is a VAT, you can’t continue to collect income tax.
Jeremy Scott, contributor at Forbes Magazine, reviews the regressive VAT against the progressive income tax and concludes that a VAT in the U.S. would affect the middle class (whatever that is, these days) the most.

At the end of the day this is of course a purely academic discussion. Whenever a VAT is introduced, the taxpayer should be somewhat relieved of the burden of income tax, but not entirely. Plenty of examples are at hand world-wide, most recently the implementation of VAT in Kenya.

The practical issue that no-one in the U.S. is willing to address is the matter of the state and local governments that collect a hodgepodge of indirect taxes (most notably sales tax), versus the federal need for additional revenue.

In a somewhat, but not entirely similar scenario, China has been very forceful in integrating the business tax (local government revenue) into the VAT (central government revenue). Local governments get to keep whatever is left of the local indirect taxes, as well as get a share of the VAT pie.

Practically and politically there is no way that this will ever happen in the U.S., given that politicians are even willing to shut down the store for something as elementary and essential as healthcare for all.

The U.S. income tax system is progressive because we tax the wealthy at higher rates. A VAT is regressive because it generally benefits higher-income taxpayers (who consume proportionately less of their income and wealth). There is no good reason to reverse the tax-friendly policies for the middle class that the United States has adopted over the last 35 years.

Via Forbes: Income Tax vs. VAT | Value Added Tax Blog.


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