Mankiw on the VAT

May 3, 2010

A nice primer on the issues surrounding a value-added tax from Greg Mankiw. This is the key part for me:

Moreover, a VAT is the twin of the flat tax that conservatives sometimes advocate. To see why, imagine that we started with a VAT. Then we add a wrinkle: We allow businesses to deduct wages, in addition to the cost of goods and services. We also require households to pay a tax on their wage income.

Other than shifting the responsibility for the tax on wages from the business to the household, it might seem that we haven’t done anything significant. Indeed, we haven’t. But the new tax system would no longer be a VAT. It would be the flat tax that Robert E. Hall and Alvin Rabushka first proposed back in 1981.

Me: Wouldn’t the D-R compromise here be a Hall-Rabushka VAT as a revenue-neutral replacement for the income tax? See how to what extent it works its pro-growth magic before boosting it. But those would need to significant given the disruption converting a brand-new tax system would cause. Just eliminating investment taxes is a quick and easy way to a consumption tax.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/