Many countries in the world have a value-added tax (VAT), including our neighbor to the north. But, so far, Congress has shied away from implementing a VAT in the United States, for—and let’s be real—mostly political reasons. But is it an impossibility? For this roundtable, we convened a group of experts on VAT, including Harley Duncan, managing director at KPMG’s Washington national tax office; Itai Grinberg, professor of law at Georgetown University Law Center; and Christopher Hall, manager of indirect taxes at Ford Motor Company in Dearborn, Michigan. Tax Executive Senior Editor Michael Levin-Epstein moderated the roundtable.
Michael Levin-Epstein: What’s the possibility of having a VAT in the United States?
Harley Duncan: In the near term, and I’d say near to medium term, I don’t think the prospects are particularly high that we will see a value-added tax in the U.S. Despite the fact that a VAT could add some significant, positive attributes to our tax system, I think the political environment is such that we would be unlikely to see a VAT. I think over time those prospects might change given budget situations, deficits, demographics, and the like. But in the near to medium term, I’m not particularly high on the prospects.
Itai Grinberg: I agree with what Harley has said. An old joke is that one party thinks that a VAT is regressive and the other party thinks that it’s a money machine, and if they flipped views, then maybe we’d get a VAT. More seriously, I think it’s fair to say that at a political level, we’re just not that close to having a VAT in either party. At the same time, from an intergenerational perspective, what the long-term budget outlook highlights is a national tax-and-spending plan that asks succeeding generations to pay through income taxes for fast-growing, unfunded, largely health-related liabilities that the baby boomers enacted and will be the primary beneficiaries of. One might think that it would be fair for society to at least try to spread the cost of those programs more evenly across generations, and if we ever reach that view, we’ll then think a consumption tax might do that more effectively than an income tax. A VAT is one form of consumption tax.
Christopher Hall: I would agree with both Harley and Itai. I think it’s unlikely, and I would say highly unlikely, that we would move to a VAT in either the short term or medium term. I agree with all of those reasons. I would add that the efforts just to modify the existing regime of the retail sales tax, recognizing that it’s state and not federal, the streamlined sales tax project, as worthy as that is or may be, has been going on now for about seventeen years, and it still has not yet accomplished the objective. The Marketplace Fairness Act of 2017 is a step in that direction, but I just don’t see the political will to be there to implement a federal VAT, currently or in the intermediate term.
Levin-Epstein: Have there been any previous attempts to enact a VAT in the United States?
Duncan: I would think it depends on what you would call an “attempt.” If you look at the history of federal tax reform proposals, the current one that at least the House leadership put out is closer to a consumption tax. It has some VAT characteristics, so there’s been some movement in that direction. Congressman [Jim] Renacci, a Republican, introduced a VAT in this last Congress; Senator [Ben] Cardin, a Democrat, also introduced one in the Senate. There have been some other things that look like VATs, but as far as serious consideration of a pure VAT, the blueprint that’s out there is about as far as they’ve gotten in that regard, it seems to me.
Grinberg: I think we should distinguish between a destination-based cash-flow tax [DBCFT] and a VAT. I think that the House Republican blueprint is a tax focused on domestic consumption, but it is sufficiently removed from a VAT that it should not be called a VAT. That’s a distinction that’s worth maintaining. At the same time, you need to learn from certain VAT principles as you implement a DBCFT of the kind proposed by House Republicans in order for the DBCFT to function well. Separate from the House blueprint, however, it’s not just Democrats who have introduced VATs. Senators [Ted] Cruz and [Rand] Paul each proposed a subtraction-method VAT during the 2016 presidential race. Each strongly maintained that what they were proposing was not a VAT, but those proposals were not destination-based cash-flow taxes like the House blueprint. The Cruz and Paul proposals did not have wage deductions. They were, in effect, VATs. One interesting problem we have on the right is that we’ve now reached a point where there are parts of the Republican Party that want to propose a consumption tax modeled on a VAT but adamantly refuse to call it one. I think that’s something that may last a long time, though.
Grinberg: We need to work through that.
Levin-Epstein: Are the objections raised when a VAT has been proposed in one form or another mostly political, mostly economic, or some combination of the two?
Hall: From my perspective, I think they tend to be mostly political. I think that when they’ve been discussed in the past there’s been a suggestion that it’s one step on a slippery slope to a more socialist and less desirable structure.
Grinberg: I think the genuine concern among some conservatives is that if you have a VAT and an income tax, even if the VAT is initially enacted to reduce income tax rates, in a moment of Democratic control, it would become possible to raise both rates and substantially grow the government. I think that’s the concern on the right. On the left, I think the concern is all about perception that the tax is regressive in an environment where the left increasingly is just laser-focused—to the exclusion of all else—on the question, “Are we redistributing more or not?”
Duncan: I agree with both of those comments. I think it was put most plainly by the lead tax policy person for Speaker [Paul] Ryan in the last two weeks or so [late April] when there was lots of furor about the destination-based cash-flow tax. He just said, “We are not going to do a VAT. We are not going to do an add-on tax. We are going to have one tax, and it’s not going to be a VAT. We just cannot deal with that [a VAT] from a political standpoint.” There is one other concern that has come into play. I don’t know that they’ve had to be very active in recent years, but when the issue of a possible VAT in the U.S. has come up, state and local governments, states in particular, have largely been in opposition to, or at least expressed pretty serious concern about, the federal government moving into the consumption tax arena. They believe that, as we’ve divided up revenue sources in this country, the consumption tax is the one that’s been left to the states. They see that the federal government dominates the income tax, and that constrains what they can do with that tax. So, they’ve been resistant, especially with respect to any VAT proposals that are really transaction-based consumption taxes. It’s not expressed so loudly with some of these other variants that move in that direction, but they are very fearful of a federal tax that would move into the consumption tax space and compete with retail sales tax.
Levin-Epstein: What about possible federal-state competition for the tax dollar? How important is that, and is there any kind of constitutional issue that would hinder the implementation of a federal VAT?
Hall: I think in terms of the revenue bases of state governments, obviously they have different mixes of tax types: many have state income taxes, most have a broad-based retail sales tax, and then some have very broad gross receipts–type taxes, like the Washington [state] B&O tax, as an example, and lots of other sources including excise taxes of various types. It’s a very complex framework and quite different from state to state. And then of course you’ve got the tax at the local level, both in terms of transaction taxes, property taxes, as well as income taxes. So, very complex, very disparate, and from my experience they would generally be resistant to the idea of relinquishing any control over those revenue streams. I don’t see any particular constitutional problems if a federal-level VAT were imposed.
Grinberg: I agree with everything that was just said. I think the states have concerns that could be addressed. If one looked at Canada as an example, it is clear that one can have a consumption tax at the federal level and a consumption tax at the state and local level and indeed, with the right level of coordination, that can actually simplify, from a business perspective, consumption taxation quite a bit, because it can create incentives to harmonize the consumption tax base. Obviously, we’re dealing with that in the context of state sales taxes today, and that’s a problem that is of longstanding concern to the business communities. Nevertheless, thinking simply from the perspective of state and local governments, it is true that there are a number that are likely to express concern, at least in the present political environment. And then on a constitutional point, I agree; I simply don’t think there’s a constitutional problem.
Hall: That’s a good point. The Canada example is quite a good one. From our perspective as a large business that operates in Canada, and we have operations in most of the provinces, the compliance burden just in and of itself is significantly lower than our experience in the U.S. Because of the harmonized tax base and administrative procedures around compliance, it is a fairly straightforward thing for businesses to deal with. The provinces have the ability to flex the provincial element of the HST [harmonized sales tax], so, for example, whereas in Ontario the combined rate is thirteen percent, in other provinces it’s fifteen percent.
Duncan: I agree with Itai and Chris. Canada is probably the best example we have. India is also, if they are able to finally push through their GST system as a way of harmonizing central-government VAT and state-level VAT. The real rub, though, at least from the state perspective (and I spent a long time working for states) is that the key to harmonization efforts is to have a coterminous, consistent base between the federal consumption tax and the state-level consumption taxes. We have floundered badly in trying to bring any sense of uniformity to state-level retail sales tax bases. Now, I think if you sit back and think about it, a well-designed VAT could be a much better consumption tax base for states to build on, but to get the states to agree to that uniform base is really difficult. State legislators think they were elected for some reason, and one of those reasons is to control that tax base. That said, Canada also demonstrates one other feature, and I’m sure Chris as an in-house indirect tax person doesn’t want to hear this, but it does show that you can have a federal consumption tax and a state retail sales tax operating side by side. Now, it is more complicated for the taxpayer because they’ve got to comply with the federal as well as the state or the provincial rules in the case of Canada. But, I think it also shows that over time in Canada—in part because of a push from the business community for a better consumption tax, simplification, and removing tax from business inputs—provinces have migrated to the harmonized sales tax, the HST, system and away from maintaining their own provincial taxes to some degree. It’s not all provinces—British Columbia went for a little while and then backed off—but over time, they’re starting to move in that direction. I think that’s what would likely happen in the U.S. as well. If we ever got to the position where we had a federal VAT and gave states the option of having a harmonized system like in Canada, we’d see states move in that direction, over time.
Levin-Epstein: Let’s say we did have a federal VAT. How would that practically affect TEI members whose job it is to run in-house tax operations?
Hall: I guess as the in-house guy I’ll go first. I’ll preface my comments by noting that it would be a massive undertaking. One of the most significant changes would be with respect to what I’ll refer to as the “plumbing” of the business, in terms of how the business calculates and administers the transaction taxes. There are a number of areas that would be directly impacted. Transaction processes and the systems that those processes run on would probably be the obvious first area to be impacted. That would be both sides of the coin, if you will. On the input side, all of the procure-to-pay processes and systems, and then on the output side all of the order-to-cash or billing systems. So, for a company like Ford Motor Company, that’s a hugely complex issue, because we have multiple business units, different types of goods and services, a very significant manufacturing footprint as well as distribution and services. It would literally encompass looking at and evaluating dozens and possibly hundreds of source systems that generate transactions today. That’s a really significant one. Along with that, I would say all of the paperwork, such as contracts, agreements, purchase orders, invoices, terms and conditions, the websites that we operate—just a huge amount of change in those two areas particularly. More internally focused, I would say there would be a need for accounting changes. There would be different accounts in the general ledger to be set up. It would impact desk procedures, internal controls procedures, [and] general auditors as well as our external auditors. A huge impact that the CFO would be concerned about would be cash flow, and so, for a business like Ford, again, we’re primarily a wholesale business currently, so most of what we buy in the U.S. is not subject to sales and use tax by virtue of the resale exclusion, and most of what we sell in the U.S. is also similarly not subject to tax because it’s sold to the retail network of dealers who then sell to the final consumers. One exception is our Ford credit financing business, where we do actually collect tax on monthly lease payments from consumers. I’d say probably ninety-five percent of our base, if you will, on both sides of the coin is not subject to tax in the current regime. So, if we flip that to a federal-level VAT, obviously a majority of the transactions would become subject to tax, and that would have a massive impact on our cash flow. So, Treasury and the CFO would be keenly interested in that. I guess the final one that I’d mention is a profit impact that would need to be modeled. Here, I’m thinking about the fact that many VAT regimes have exemptions for certain types of business, and the one that would be of most concern to us would be financial services, such that it is exempt from tax on the output side. And, then, on the input side, the ability to deduct input tax is generally restricted in a way that is proportionate or commensurate with the level of exempt business. That would be a concern for us. That’s a thumbnail sketch, I would say, of significant changes.
Grinberg: That was pretty comprehensive.
Duncan: Agreed. I don’t think I could add to that. It would just require the collection, analysis, and utilization of a whole raft of data about transactions that right now for federal tax purposes don’t have to be analyzed. Not a small undertaking.
Hall: I would add one thing, and that’s on my last point about profit impact. I would point out that there would be potentially a bit of a silver lining if a VAT were enacted in terms of more harmonization with the rest of the world. If we had a VAT regime and the concept of reciprocity that many countries adopt whereby foreign VAT incurred is refundable in certain situations, this would be good. This is a feature of many EU member states in particular. That would be a benefit to us. This of course would be different for different businesses, but because our supply chain is global—we buy parts for our vehicles virtually anywhere, significant volumes from Europe, from Asia-Pacific as well as North America and South America, and as part of that we incur quite a lot of foreign VAT, and we have processes to recover it where we can, but in most cases countries do not allow that kind of recovery because the U.S. does not have a VAT.
