Document Type

Article

Publication Date

10-2025

Abstract

Former Treasury Secretary Larry Summers once explained why the United States is the only developed country that has not yet adopted a value-added tax: “Liberals think it’s regressive and conservatives think it’s a money machine.... If they reverse their positions, the VAT may happen.” It is true that the VAT is a money machine. It has been estimated that each percentage point of a broad-based U.S. VAT would raise $100 billion each year. This means that a 10 percent VAT (which may be politically possible) would raise $1 trillion each year, and a 25 percent VAT (less likely, but equal to the top EU rate) would raise $2.5 trillion each year. By comparison, the U.S. government currently raises $2.7 trillion in individual income taxes. Thus, a 25 percent VAT would raise about as much as the individual income tax, and the revenue from the VAT is much more reliable and less cyclical than the revenue from the income tax. That is why the states adopted sales taxes during the Great Depression

Comments

Reprinted with the permission of Tax Analysts.

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