Value Added Tax in OECD: We’re Number 38 (Don’t Have It)
First introduced in France in 1954, by 1960 there were fewer than ten countries worldwide that implemented the Value Added Tax (VAT); by 2022, it has become an important source of revenue in 174 countries. The VAT is a common form of consumption tax that is due at every stage of a product's manufacturing from the sale of the raw materials to its final purchase by a consumer. The OECD notes that “the spread of VAT has been among the most important developments in taxation over the last half century.” The VAT is attractive because it is capable of raising enormous amounts of revenue. In the United States, with consumption close to 70 percent of the GDP, even relatively small tax rates could capture a great deal of money.
In 2010, former Federal Reserve chairman and advisor to Barack Obama, Paul Volcker, suggested that higher taxes, perhaps a VAT or a carbon tax, might be needed to close some of the nation’s deficits. Obama said he wouldn’t rule out a VAT, despite his campaign pledge not to raise taxes on couples making $250,000 or less. It didn’t take long for the Senate—Republicans and Democrats alike--to strike back, voting 84-13 on a proposal sponsored by John McCain (Republican-Arizona): “It is the sense of the Senate that the Value Added Tax is a massive tax increase that will cripple families of fixed incomes and only further push back America’s economic recovery.” Conservative media, think tanks, and lawmakers joined forces to fully reject the notion of a VAT; but so, too, did Democrats object to such a new tax.
The possibility of a US federal VAT are slim: lawmakers on both sides of the ideological aisle are chary about introducing a new tax, even if it were to replace or modify existing federal taxes. Further, each state has its own taxing policy, and trying to coordinate and compromise with state legislatures would be an extraordinarily difficult task, full of complexities and political pitfalls.
Altogether, the OECD countries rely the most on consumption taxes, principally the VAT. In 2021, consumption taxes averaged 32.1 percent, social insurances taxes were 25.7 percent, individual income taxes were 23.9 percent; corporate taxes were 9.8 percent, and property taxes were 5.6 percent.
Sources: Consumption Tax Trends 2022: VAT/GST and Excise, OECD, n.d., https://www.oecd-ilibrary.org/sites/6525a942-en/1/3/1/index.html?itemId=/content/publication/6525a942-en&_csp_=9be05a02fe0e4dbe2c458d53fbfba33b&itemIGO=oecd&itemContentType=book#figure-d1e568; Walter Alarkon, “Value-added Tax Has Some GOP Backers,” The Hill, May 3, 2010, https://thehill.com/policy/finance/68445-value-added-tax-has-some-gop-backers/; Howard Gleckman, “Conservatives and the VAT,” Tax Policy Center, April 2010, https://www.taxpolicycenter.org/taxvox/conservatives-and-vat; Daniel Bunn and Cecilia Perez Weigel, “Sources of Government Revenue in the OECD, 2023,” Tax Foundation, February 23, 2023, https://taxfoundation.org/data/all/global/oecd-tax-revenue-by-country-2023.
