When it comes to collecting government revenue, America relies too much on income taxes and not enough on consumption taxes. Solving this problem is the key to unlocking real, bipartisan tax reform.
Right now, Democrats broadly oppose any tax-reform bill that would increase the federal budget deficit or make the tax code less progressive, while Republicans broadly oppose any bill that would raise income-tax rates or produce extra revenue to finance new spending.
If members of both parties agreed to adopt a national value-added tax (VAT) and combine it with a sweeping overhaul of the income tax, they could implement a genuinely radical reform package that would encourage investment and economic growth without adding to the deficit, creating a more regressive tax code, or inflating the size of government.
America is currently one of the few countries in the world—and the only member of the Organization for Economic Cooperation and Development (OECD)—that does not have a nationwide VAT on goods and services. In fact, both as a share of GDP and as a share of total taxation at all levels of government, we generate less revenue from taxes on goods and services than any other OECD member.
This structural difference matters, because economists have shown that income taxes in general—and corporate-income taxes in particular—hurt economic growth more than consumption taxes.
Thus, rebalancing our federal revenue structure away from income and toward consumption should be a top priority for tax reformers.