
James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
Author: James F. McDonough
Date: December 30, 2014

Of Counsel
732-568-8360 jmcdonough@sh-law.comWith all of the talk about whether or not tax reform is possible in Washington right now, it is surprisingly easy to forget about the important side of the discourse: What is it that we want from a reformed tax code? Earlier this month, Sen. Ben Cardin, D-Maryland, introduced tax reform legislation that completely breaks the mold. Will it pass Congress? Keep dreaming, but it does bring up interesting food for thought. Where mainstream politicians like departing House Ways & Means Committee Chair David Camp, R-Michigan, and President Obama are suggesting relatively modest adjustments to the tax code, Cardin introduces a value added tax. The additional revenue from this tax would then be used to dramatically lower the current rates on corporations and individuals. You can read the full bill at Progressive Consumption Tax.
What is a value-added tax?
In short, a VAT is a tax on consumption, much like a sales tax. Unlike a sales tax, which is only applied at the point of sale to consumers, a VAT is applied at every stage that value is added.
For example, if I run a ketchup factory, I need to purchase tomatoes. The distribution plants that buy tomatoes from farmers pay a tax on them. When I purchase tomatoes from the distribution plant, I pay the same tax on the tomatoes – at the new, marked-up rate – minus the amount paid by the plant. This way, each party is only paying a tax on the amount of value that was added in the previous stage.
Why would a VAT be desirable? First, even a relatively small rate can generate a lot of revenue because there is so much consumption in an economy. Second, a VAT is very hard to evade, minimize or not pay, because each link in the supply chain has to hold the other links accountable.
Lower rates on corporations and individuals
Cardin’s plan also includes a reduction of the corporate tax rate to 17 percent from its current 35 percent and the exemption of most individuals from the corporate rate. Cardin believes that this would make the U.S. more competitive, possibly even attracting corporations looking to lower their rates – a dramatic turnaround from the current situation. While a VAT is inherently regressive, meaning that those with more money pay less in the VAT relative to their income, this would be corrected to a degree by the new individual income tax rates.
Those on the far left and far right are both unlikely to sign on to Cardin’s plan. Liberals are unlikely to agree to a regressive tax rate, and conservatives are unlikely to sign on because of the potential for increased government revenues. Still, Cardin’s bill helps to promote healthy discussion about how our society should be taxed.
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