Shooting the fat on the VAT

Lawrence Lindsey, a former chief economic adviser to President George W. Bush, especially sung the praises of a VAT, a consumption tax currently utilized in much of the world. 

In his testimony, Lindsey said the current income tax system is too complicated and noted that China’s value added tax accounted for a third of its revenues. 

“So having an income-based system, while most other countries in the world, including in Europe and Canada, are moving away from an income-based system and toward value added taxation or indirect taxation puts us at a competitive disadvantage,” Lindsey said.

“All roads are going to lead to a VAT,” Lindsey said later in the hearing. 

A value added tax, generally speaking, is charged on goods at every stage of production. The VAT has been discussed in recent years as a potential weapon against the deficit, including in a 2009 Washington Post article where Sen. Kent Conrad (D-N.D.), the Budget Committee chairman, said it was something that needed to be on the table.  

But at Wednesday’s hearing, senators from both parties threw some cold water on the idea of a VAT. Sen Rob Portman (R-Ohio), a budget director in the George W. Bush administration, called the idea politically difficult. And Sen. Ron Wyden (D-Ore.), a longtime proponent of tax reform, noted that the Senate has overwhelmingly expressed its opposition to a VAT. 

Tax reform is an area that has been discussed as a possible area of bipartisan cooperation in the particular Congress. The witnesses at Wednesday’s hearing – who also included Eugene Steuerle of the Urban Institue; Donald Marron of the Urban-Brookings Tax Policy Center; and Rosanne Altshuler of Rutgers University – all said the American tax system was in dire need of fixing.