Ajay K. Mehrotra, Northwestern Pritzker School of Law and the American Bar Foundation, has posted The Missing U.S. Vat: Economic Inequality, American Fiscal Exceptionalism, and the Historical U.S. Resistance to National Consumption Taxes, which is forthcoming as 117 Northwestern University Law Review 151 (2022):
Since the 1970s, economic inequality has soared dramatically across the globe and particularly in the United States. In that time, one of the obstacles of using fiscal policy to address inequality has been the growing myth of the “overtaxed American”—the misguided notion that U.S. taxpayers pay more in taxes than residents of other advanced, industrialized countries. This myth has persisted, in part, because of the peculiar and distinctive nature of the fractured American fiscal and social welfare state. Even a cursory review of comparative tax data shows that the United States, by most measures, is a low-tax country compared to other affluent nations. One reason for this shortfall is the missing U.S. value-added tax (VAT).
Unlike the United States, other developed countries fund robust social spending through a balanced mix of levies, including by relying on broad-based national consumption taxes such as a VAT, which produces a tremendous amount of government revenue. By contrast, the United States has historically rejected comprehensive national consumption taxes, suggesting something distinctive about American fiscal policy. This American fiscal exceptionalism leads to a series of important research questions that may help us understand the relationship among fiscal policy, social welfare spending, and economic inequality: Why is the United States such an outlier in global comparisons of national taxes? Why have Americans historically resisted broad-based national consumption taxes of any kind? Simply put, why is there no U.S. VAT?
This Essay begins to address these fundamental questions by, first, synthesizing the existing literature to provide several stylized facts about global economic inequality and the particular concentration of wealth in the United States. Second, the Essay explores the distinctive and peculiar nature of the modern American fiscal and social welfare state, illustrating how the U.S. reliance on direct and progressive taxes and indirect and stealth social welfare spending may be perpetuating the myth of the overtaxed American. Finally, the essay identifies three key historical time periods when the United States seriously considered, but ultimately rejected, a broad-based national consumption tax. This Essay focuses mainly on the first period of the early 1920s, when post-World War I historical conditions provided tax experts, lawmakers, and social groups an opportunity to consider the adoption of a wide-ranging national consumption tax. The Essay concludes with some reflections on how the missing U.S. VAT may inform future tax reform and attempts to address economic inequality.
--Dan Ernst
