VAT in a Federal System: Lessons from Canada

Abstract

For many years it has been argued that the value‐added tax (VAT) is neither desirable nor feasible as a subnational tax. At the same time, the existence of state retail sales taxes (RSTs) has been seen by some to be a major obstacle to introducing a federal VAT in the United States. Canada has demonstrated that both these barriers can be overcome. A federal VAT can work well regardless how (or if) states tax sales. In addition, a federal VAT may make it more feasible for states, if they wish, to introduce their own VATs.