The US Is the Last Major Country Hanging on to the Sales Tax

Amid all the tax plans floated out during this campaign, only one remaining candidate, Ted Cruz, has proposed increasing tax on general consumption. In Cruz's plan, the US would impose a 16% subtraction-method value-added tax (VAT), which he calls a "business flat tax." Although Cruz's plan seems unlikely to pass, it's actually more in line with where the rest of the developed world has gone in the last 50 years than where the US currently is.

Right now, the US taxes general consumption through a hodge-podge of state and local sales taxes. In 2013, these taxes raised revenue equal to 2% of GDP. In 1965, many developed countries had similar kinds of sales taxes, but since that time, they've all moved away from them, with the US the sole exception moving in the opposite direction.

As these countries wound down their sales taxes, they created and wound up value-added taxes, with again the US as the sole hold out.

Both the VAT and a conventional sales tax impose their burdens on the final consumer of goods and services, but the VAT typically does so in a more efficient manner less prone to fraud.

Cruz's idea of imposing a 16% VAT is, by itself, not a bad one. The problem is that he doesn't use it to replace existing sales taxes and instead uses it to cut income taxes and reduce the overall tax level. A better move would be to simply add the 16% VAT on top of our current taxes. That would go a long way towards bringing in the kind of revenue we need for a really good welfare state.

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