The Federal Sales Tax That Was: American Miscellaneous Excise Taxes, 1940–1971

Why is there no value-added tax (VAT) in the United States? While the United States does have a system of retail sales taxes (with comparatively low rates) at the state level, it is unique among developed countries in not having a national VAT. This has been lamented not only by conservatives worried about the overreliance of the federal tax system on income taxes that discourage savings and investments, but also by liberals citing social scientists who suggest that relying on consumption taxes may make it easier to build and maintain an expansive welfare state.¹ Since the late 1960s, economists and fiscal policymakers have repeatedly advocated the introduction of a federal VAT, but to no avail. Elsewhere in the Anglophone world, imposition of a VAT was made possible by the prior existence of a national-level sales tax whose numerous defects, including a narrow base, varying rate structure, and unsystematic exemptions, enabled the VAT to be portrayed as a reform of the existing sales tax.² But in the United States there was no federal sales tax that could plausibly be transformed into a VAT. As a result, introduction of a national VAT here would have involved the addition of a new tax burden rather than the mere reform of an existing one, dooming all such proposals to failure.

In explaining why there was no federal-level sales tax here that could serve as the basis for a VAT, historians have focused on the early twentieth century, when Congress repeatedly rejected a general sales tax—most famously in the so-called "Sales Tax Rebellion" of 1932. Ajay Mehrotra has argued that Progressive Era tax reformers' obsession with "ability to pay" as the chief criterion for designing taxes—an obsession that led to the entrenchment of a steeply progressive income tax in the 1910s—produced a "fiscal myopia" that precluded the later consideration of broad-based consumption taxes. Kimberly Morgan and Monica Prasad, in comparing the United States to France, have similarly located the critical juncture in the early decades of the twentieth century, when both agrarian discontent and the Progressive response to the excesses of rapid industrialization led to the institutionalization of a tax system that depended on a progressive income tax. Lawrence Zelenak and Joseph Thorndike, however, have each argued that congressional enactment of a national sales tax was still a real possibility in the early years of World War II and was blocked only because of the unyielding opposition of President Franklin D. Roosevelt and the Treasury Department. But even in this interpretation, the introduction of a VAT was effectively precluded after Congress introduced mass-based income taxation instead of a sales tax in 1942.³

Missing in this picture, though, is that as late as 1965 the United States, in addition to the state sales taxes, did in fact have a system of federal excise taxes on the sale of a wide range of goods, ranging from automobiles to musical instruments and furs. This was not a general sales tax with a flat rate, like the ones rejected earlier by Congress, but rather a highly progressive system of selective taxes on luxury items, which is precisely what allowed it to flourish in the political culture of the 1940s. It was also quite fruitful—in the early 1950s it raised just as much money as the general sales taxes at the state level, and as late as 1963–64 its yield was still 60 percent of that for the expanding state taxes.⁴ But the Excise Tax Reduction Act of 1965 eviscerated the federal excise tax system, with only the automobile sales tax limping on until finally being eliminated in 1971. It was this elimination of a progressive system of excises, which has been almost completely ignored by historians of the American tax system, rather than the earlier rejections of a general sales tax by Congress, that finally shut the door on the possibility of a federal VAT in the United States.⁵

The potential inherent in the federal excise tax system becomes particularly apparent when it is...