Ramesh Ponnuru sees much to like in Rep. Devin Nunes’s call for replacing the corporate income tax with a new “business consumption tax” (BCT). I like the idea too. And the BCT had been championed earlier on by Nunes’s close ally, Rep. Paul Ryan. But many anti-tax conservatives objected to the business consumption tax on the grounds that it is essentially a VAT. Last year, Chris Papagianis discussed the formidable barriers to reforming the corporate income tax, and he concluded that a business consumption tax might be our best option.
My concern regarding the BCT as a replacement for the corporate income tax is that if we’re going to introduce a new consumption tax, I wonder if it might make more sense to use it to reform the personal income tax. Implementing a new consumption tax is a heavy political lift and one would want to build as broad a coalition behind it as possible. One can imagine Congress trying to sell the BCT as an under-the-radar technical fix for the corporate income tax, which ordinary consumers pay indirectly and tend not to recognize. But this runs into the conservative concern that VATs are stealthy money-machines. A highly-visible VAT, in contrast, could help address the “skin-in-the-game” problem often cited by Tea Party conservatives. By surfacing the cost of government in transactions on every receipt for almost every transaction, a highly-visible VAT would “nudge” consumers into recognizing that the growth of government is not a free lunch, even when we use rebates to minimize the impact on low-income household consumption. Though the BCT and Michael Graetz’s Competitive Tax Plan (CTP), which we discuss below, rely on a VAT to replace or largely replace a burdensome existing tax, they pursue quite different political strategies.