Tax Policy Fantasyland

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Greg Mankiw sings the praises of the Value Added Tax, offering affection for the efficiency of its flat- and consumption-oriented nature:

My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

As long as we’re talking about hypothetical scenarios, I would join him if we’re allowed to throw state and local taxes into the mix as well. The thing of it is that once you consider state and local taxes, the US tax code is barely progressive at all:


In theory, I think the tradeoff between tax efficiency and tax progressivity could be quite the difficult dilemma. But what we’ve got, when considered overall, is a system with lots of inefficiency and almost no progressive impact. That, I think, makes the tradeoff easy. The VAT-only system wouldn’t be my first choice tax system by any means, but the case that it would be an improvement over the status quo seems very strong to me.