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Publication Date

Winter 2006




University of Virginia




The most sustained U.S. tax policy debate of the past 30 years concerns proposals to replace and/ or supplement the Federal Income Tax with a consumption tax. Public finance economists and legal tax policy scholars challenged and defended the current income tax system on grounds of fairness, efficiency, and simplicity.

This debate over revamping the national taxing scheme has not been argued purely in the academic forum. Concrete legislative proposals have been advanced for a national retail sales tax, a European-style Value Added Tax, as well as a whole host of what David Bradford calls "the two-tiered consumption taxes."

From early on, a characteristic of this debate has been the marginalization of practical questions about the "fit" of these proposals both internationally and sub-nationally. The advocates of change tend to narrow their focus. Although great efforts are devoted to gathering intellectual support from economic theorists and political philosophers, much less effort is expended to demonstrate system-wide (local-state-federal) tax harmony. As a result, proposals tend to be stand-alone (federal-only) propositions. The theoretical analysis in supports a federal consumption tax therefore tends to consider things from the "top-down," rather than the "bottom-up."

Integrated legislative proposals that work to maximize the "administrative fit" of a federal level consumption tax with existing sub-national consumption taxes are rare. This proposal for the US adoption of a D-VAT is intended as an administrative supplement to proposals for a European-style, destination based, credit-invoice VAT. As drafted, it is not concerned with achieving revenue neutrality, a concern of the President's Advisory Panel on Federal Tax Reform, nor is it concerned with the issue of revenue generation sufficient to allow the replacement of all or part of the federal income tax system, as has been a staple argument in the consumption tax debate over the past decades. This proposal for a D-VAT does not disagree with the VAT proposals advanced by Professor Graetz and Avi-Yonah, or with those proposed in Congress by Senator Hollings. What it does suggest is that if the US is contemplating going in the direction of a national consumption tax, and if that direction is for a VAT, then the administrative design should be an intensely digital one.

The intent is to focus attention on the opportunity that the US has to design a truly modern VAT, one that will not only achieve the self-enforcing promise of the earliest advocates of this tax, but one that will re-enforce the diversity of tax design that has been a hallmark of American fiscal federalism. The D-VAT provides a mechanism for achieving the broadest possible consumption tax base. The D-VAT Card provides a surgical answer to tax regressivity. The D-VAT Card (considered separately in XXXXX) is a mechanism for immediate, point-of-sale relief to those determined to be in greatest need. These are opportunities that the US should not miss out on, if a national VAT is in the future.

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