Implementing a Progressive Consumption Tax: Advantages of Adopting the VAT Credit-Method System

A credit-method value-added tax, a payroll tax, and a business-level wage subsidy can approximate the economic and distributional consequences of a subtraction-method X-tax. Such a credit-method progressive consumption tax has administrative advantages as compared to a subtraction-method progressive consumption tax, once certain political factors are taken into account. Further, unlike a subtraction-method system, a creditmethod progressive consumption tax could easily interact with other tax systems around the world and comply with World Trade Organization rules without sacrificing best practice VAT design features that allow for effective enforcement.