US VAT Proposal Floated In The Senate

by Mike Godfrey, Tax-News.com, Washington

17 December 2014

Ben Cardin (D – Maryland), a member of the Senate Finance Committee, has introduced the Progressive Consumption Tax (PCT) Act, which would introduce a tax of ten percent on the purchase of goods and services, while using the new revenue to cut individual and corporate tax rates.

Cardin pointed out that a broad-based PCT could be used to reduce the US corporate rate by more than half, to 17 percent, thereby improving America's international competitiveness by lowering its rate below the Organisation for Economic Cooperation and Development (OECD) average.

For individuals, the new tax would be designed to be "at least as progressive as today's tax system." Low- and middle-income families would be protected from consumption taxation through a rebate, while income tax exemptions, called "family allowances" in the new system, would be set at USD100,000 for joint filers, USD50,000 for single filers, and USD75,000 for head of household filers, and would be indexed for inflation.

It is intended that those allowances and the rebate would "eliminate an income tax liability for an overwhelming majority of American households," although similar support as present programs, such as the Earned Income Tax Credit and Child Tax Credit, in the present US tax code, would still be provided. Four important income tax benefits would also remain: the charitable contribution deduction; the state and local tax deduction; health and retirement benefits; and the mortgage interest deduction.

The top marginal individual income tax rate, applicable to taxable income over USD500,000 for joint filers, would be 28 percent, down from the current top marginal rate (applicable to taxable income over approximately USD450,000 for joint filers) of 39.6 percent.

The PCT would be a value-added tax, with the PCT Act providing for an input tax credit system. The PCT Act sets out what would constitute a taxable supply and sets out potential administrative rules. Exported goods and services would be zero-rated, and exemptions would be provided for financial services and the lease or rental of residential real estate. The PCT would also include a reverse charge mechanism.

A revenue circuit breaker, tied to a percentage of US gross domestic product, would also be built into the Cardin system to set reasonable limits on the amount of income generated by the new tax.

Cardin said that the PCT Act has been introduced at the end of the current Congress "to provide an opening for discussion and a first opportunity to review legislative language for this type of comprehensive tax reform."

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