What about his reform principles? Mr. Romney talks only in general terms. “Moving to a consumption-based system is something which is very attractive to me philosophically, but I’ve not been able to sufficiently model it out to jump on board a consumption-based tax.” … Since Mr. Romney mentioned a consumption tax, would he rule out a value-added tax? He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.
1. Many conservatives/libertarians simply hate, hate, hate the idea of a VAT. (Here is a great Congressional Research Service study on the VAT.) They view it as a way to fund a massive expansion of government. I would be surprised if those quotes don’t end up in a 30-second, anti-Romney ad in Iowa or New Hampshire. Grover Norquist sums up their objections thusly:
But simply, a VAT is a European-style sales tax. It’s assessed on the profits generated at every stage of production (raw material, manufacturer, wholesaler, retailer, etc.), so there is constant reporting and payment. As such, it’s an extremely efficient money machine for big government. The VAT is embedded inside the price of a good … As such, people forget they pay it, and European governments have found it too easy to raise the tax repeatedly over time.
Indeed, many on the left think adding a VAT to the current tax code could immediately raise hundreds of billions of dollars or more a year in new tax revenue and could avoid entitlement cuts. The Obama White House apparently thought a VAT might finance Obamacare.
2. Yet Romney is certainly correct that the U.S. tax system should reduce the current bias against investment. Many economists on the left and right would agree that America has consumed too much and invested too little in recent years. Many studies have suggested that replacing the income tax system with a consumption tax could boost economic growth over the long run by 5 percent or more, increasing tax revenue by 1 percent of GDP via that increased growth–not by increasing the tax burden. Some economists here at AEI like the idea of the Bradford X tax, a graduated consumption tax that eliminates investment taxes.
3. You can have a value-added tax that is economically efficient and pro-growth but does not have the transparency issues that Norquist and other small-government advocates worry about. Many flat taxers, for instance, like the 19 percent Hall-Rabushka flat tax, a plan which has served as the model for many flat tax proposals. As with the X tax, businesses under a Hall-Rabushka system would deduct cash wages from the cash flow on which they calculate the VAT.
4. Romney is right that Ryan has proposed replacing the current corporate income tax with a business consumption tax in his Ryan Roadmap. The plan says a BCT would “enhance the international competitiveness of U.S. businesses and put the economy on solid footing to meet the challenges of the 21st century.”
5. As long as a consumption tax is a) transparent and b) not just slapped on top of the current tax code, it is definitely worth considering as a critical way of boosting U.S. growth.