A Republican lawmaker introduced a tax reform plan Thursday that includes a proposal that divides conservatives, namely a value-added tax.
Rep. Jim Renacci, an Ohioan who sits on the tax-writing House Ways and Means Committee, announced a tax reform proposal that would simplify and lower tax rates, while eliminating the corporate income tax for a 7 percent value-added tax.
An outside analysis suggests that Renacci's plan would spur economic growth, perhaps even more than the House Republican tax reform plan recently proposed by House Speaker Paul Ryan, Ways and Means Chairman Kevin Brady, and other Republicans. That platform calls for lowering the corporate tax rate to 20 percent, down from 35 percent now.
Renacci argued that a "simple corporate rate reduction around the [Organization for Economic Cooperation and Development countries] average won't stop companies from relocating overseas or being acquired by foreign companies located in jurisdictions with more pro-growth tax regimes."
The nonprofit Tax Foundation estimated that Renacci's plan would create 1.9 million jobs and boost incomes. Thanks partly to that faster economic growth, it would actually raise revenue for the Treasury despite cutting tax rates. Over 10 years, according to the Tax Foundation, those added tax collections would total nearly $700 billion.
Yet selling a value-added tax could prove difficult for Renacci within his own party.
A value-added tax is one in which goods and services are taxed at each stage of the production process, rather than just on profits at the point of sale.
Because the tax applies to such a large base, even a low rate, such as 7 percent, raises a lot of revenue. As a result, some conservatives fear that it would be easy for a Democratic president to raise the rate on a VAT to finance new spending programs.
The issue was discussed relatively frequently in the GOP presidential primary, with Florida Sen. Marco Rubio arguing that Texas Sen. Ted Cruz's tax plan, which included a form of VAT, would increase the size of government.
Most developed countries have some form of VAT. In recent years, the United States' peer countries have cut corporate tax rates and relied more on VATs, giving U.S. companies a reason to try to escape the U.S. tax rates.