Methodology for Distributing a Value Added Tax (VAT)

“Methodology for Distributing a VAT” evaluates different approaches used by federal government agencies for determining the distributional burden of a VAT and proposes a new one that includes key improvements including differentiating between the burdens during the transitional period and once it is fully in place. The new methodology and upcoming series of VAT papers written by the Tax Policy Center (TPC) will provide the analysis and facts to inform the tax debate.

Given the current projections of growing U.S. federal debt, some economists and policy makers are discussing a national VAT as part of the remedy for America's fiscal problems. VATs are major sources of revenue for all Organization for Economic Co-operation and Development (OECD) countries, except for the United States. One of the primary considerations when looking at any new consumption tax, such as a VAT, is how its burden would be distributed across age groups and income levels. Since neither Congress nor the executive branch has actively considered a VAT in recent years, the federal tax estimating agencies – the Congressional Budget Office (CBO), the U.S. Department of the Treasury's Office of Tax Analysis (OTA) and the Joint Committee on Taxation (JCT) – have not been required to estimate the distributional burden of a VAT for some time. The insights from this TPC paper should prove useful to the agencies as they consider how methods of estimating the distributional burden of a national VAT may be updated.

Executive Summary - Methodology for Distributing a VAT April 2011