Generally speaking, VATs add a levy at every stage of manufacturing and distribution, which leads to higher prices for many consumer goods. But a wide range of economists also have embraced the idea for its efficiency at raising revenues, and some of the countries that have adopted a VAT also have been able to reduce their corporate tax rate – something policymakers in Washington would like to do as well.
Still, VATs have not proven particularly popular with lawmakers in either party, with some Democrats complaining they would be regressive. Meanwhile, Republicans – who have steadfastly opposed any tax increases in the current debt-ceiling debate – have expressed concern in the past that VATs are too adept at bringing in revenue, which they say would just give the federal government more money to spend.
The Fair Tax – which has been embraced by Republicans like Sen. Richard Lugar of Indiana and presidential candidate Herman Cain – would abolish the IRS by instituting a consumption tax of, depending on who you ask, 23 percent or 30 percent.