At a recent event, William Gale discussed the possibility of using a value-added tax (VAT) to solve the budget deficit in the United States. He argued that instituting a VAT could be a good, although not perfect, way to raise new revenues that could be used for both deficit reduction and tax reform. He detailed the use of a VAT around the world, noting that approximately 150 countries have instituted one, and in most, it either raises the most revenue or the second most, after the income tax.
Gale also outlined the two different ways to set up a VAT: the credit invoice and the subtraction method. The credit invoice is set up so that each transaction includes the tax. The subtraction method more closely resembles an income tax with the tax added up at the end of the year. This set-up is similar to parts of Herman Cain’s 9-9-9 plan.
According to Gale, a VAT does not have to be either a money machine or regressive. In most countries with a VAT, there has been no growth in the size of the government due to the tax or major increases in the tax rate itself in the past twenty-five years. Yet it remains one of the best ways to raise substantial amount of revenue; raising a comparable amount with income tax reform would require massive increases in the tax rates.