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VAT Your Problem Is?

Greg Mankiw on the value added tax:

Although a value-added tax is just another form of a retail sales tax, a VAT has the advantage of being harder to evade. Tax experts believe that large retail sales taxes lead to compliance problems, which we can avoid by collecting the same tax along the chain of production.

True. There are, however, two problems:

  1. It will not be easy for the consumer to gauge the amount of tax paid when purchasing an item with a VAT system. When the price of an item goes up; is it because of the VAT or the companies which manufactured the item or both?
  2. It is unlikely that the Democrats will propose VAT as a true substitute for the current retail tax structure. The VAT will be slapped on on top of other taxes -- which I doubt will help efficiency. Of course, it'll be great for the IRS.


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