Using a VAT to Reform the Income Tax

Jan 24, 2012

The federal tax system has grown increasingly complex over the past several decades with the introduction of the Alternative Minimum Tax (AMT), new and expanded corporate and individual tax expenditures, and other special provisions. Policy makers and economists have discussed how a value-added tax (VAT) could be used to both raise revenue and simplify the tax system. Meanwhile, the United States is the only member of the Organization for Economic Co-operation and Development (OECD) that does not employ a VAT.

This paper, written by the Tax Policy Center (TPC) and sponsored by the Pew Fiscal Analysis Initiative, is designed to help policy makers better understand the impact of a VAT if used to simplify the tax system. It analyzes a proposal by Michael Graetz, a Columbia University law professor and tax expert, that would introduce a VAT and reform the individual and corporate income tax systems. Graetz’s plan is one of the few proposals that include a VAT as part of a more comprehensive tax reform that is currently being discussed by policy makers and tax policy experts. The paper analyzes the effect the proposal, if fully implemented in 2015, would have on federal revenues and spending, the deficit, the distribution of the tax burden, and the new system’s compliance costs.

This is the third in a series of papers that analyzes different components of a VAT.

Executive Summary 

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