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.^{Footnote 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.^{Footnote 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.^{Footnote 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.^{Footnote 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.^{Footnote 5}

The potential inherent in the federal excise tax system becomes particularly apparent when it is compared with a very similar progressive sales tax on selected luxuries in Great Britain, called the purchase tax, which did survive the 1960s to become the basis for the VAT introduced there in 1973. Great Britain’s tax system indeed was quite similar to the American one throughout the early twentieth century. Here the legislature also rejected a flat-rate sales tax in 1940; earlier sales tax proposals in 1919 and 1922, unlike in the United States, were dismissed by the Treasury Department before even reaching the legislature as being contrary to British fiscal traditions. As in the American case, the British tax system relied heavily on a progressive income tax that had been first introduced by radical reformers in the early 1900s and then grew enormously during World War I. As in the United States, the British income tax in the 1920s and 1930s was a class tax, with only about 15 percent of British tax units liable for income taxes as late as 1937. Customs duties and excises, foremost among them the traditional taxes on alcohol and tobacco, accounted for only 30 percent to 40 percent of total British tax receipts throughout the 1920s and 1930s—a lower percentage, in fact, than for American federal tax receipts during the New Deal years. And like the Americans, the British broadened the income tax into a mass tax during World War II, with British income and profits tax collections in the late 1940s at around 14 percent of gross domestic product (GDP), higher than American ones at roughly 10 percent of GDP.^{Footnote 6}

Thus, it was not a focus on progressive income taxes in the early twentieth century that precluded a VAT in the United States, for a similar focus still allowed a VAT to emerge in Great Britain. Instead, the critical decisions came after the expansion of the American excise tax system and the introduction of the British purchase tax in response to World War II. These taxes were initially accepted in the progressive political culture of both countries because they were structured as selective taxes on luxuries. But in the 1950s, British Treasury officials under a Conservative government slowly transformed the purchase tax into a somewhat broader consumption tax by expanding its base and flattening its rates, thereby rendering it more able to withstand attack by affected interests, while their American colleagues neglected the excise tax. Then, in the mid-1960s, a unique set of historical contingencies (including a long period of benign economic conditions, the success of the 1962 and 1964 income-tax cuts, and a delay in recognizing the inflationary implications of military escalation in Vietnam) led to the American excise tax being killed off, while a Labour government found itself compelled to retain and even expand the purchase tax.

In 1951, both the British purchase tax and the American federal selective excises were qualitatively quite similar: they both were narrowly targeted taxes on a select group of luxuries and consumer durables with a wide range of rates. This progressive slanting allowed these consumption taxes to gain traction in the “soak-the-rich” political culture that had led to the rejection of regressive general sales taxes in both countries. In the case of Great Britain, the purchase tax had not originally been intended as a luxury tax; when John Simon, Chancellor of the Exchequer in the Conservative government of Neville Chamberlain, had first announced the tax in April 1940, it had been as a flat-rate sales tax with only a few broad exceptions.^{Footnote 7} But members of the Labour opposition immediately attacked the proposed tax as a “thoroughly bad” and “insane tax” that would “hit the poor far more . . . than the rich.”^{Footnote 8} Once Labour entered an all-party coalition government under Winston Churchill and made clear that it would not agree to a flat-rate tax, the original proposal was replaced with a graduated tax of 33 1/3 percent on nonessentials and 16 2/3 percent on such goods as clothing, boots, and pots and pans, with exemptions expanded to cover children’s clothing and footwear as well as books and newspapers.^{Footnote 9} Still dissatisfied with the broad scope of the purchase tax, Labour politicians kept pushing for further concessions, particularly on clothing and furniture. In 1942, so-called utility clothing, which was manufactured to government-mandated specifications designed to conserve scarce wartime resources, was exempted from the purchase tax. When utility schemes were later introduced for footwear and furniture, the purchase tax exemption was extended as well.^{Footnote 10} In order to make up for the revenue lost due to these exemptions, the chancellor in 1942 doubled the purchase tax on selected luxuries to 66 2/3 percent; a year later, he further increased the rate on these articles to 100 percent, a move that generated essentially no opposition in Parliament.^{Footnote 11}

In 1945, after Labour’s surprisingly strong victory in the postwar election, Hugh Dalton, author of the utility scheme, became the first Chancellor of the Exchequer of the new Labour government. Sensing that Labour voters resented income taxes withheld from their pay packages even more than the hidden consumption taxes, he chose in his first two budgets to concentrate on cutting income taxes, especially for those in the lower income brackets, rather than abolishing the purchase tax.^{Footnote 12} But he also made sure that the purchase tax was in fact primarily a tax on “the mink coat of the millionaire’s mistress” and other “articles that are far outside the purchasing power of the working class” by devoting some of his tax cuts to exempting goods that Labour voters might see as necessities. In 1946 he freed pots and pans, kitchen furniture, utility blankets and mattresses, and office machinery from purchase tax; a year later, he also removed dustbins, buckets and pails, and children’s playground equipment from the taxable list.^{Footnote 13} Meanwhile, recurring balance-of-payments crises pushed the government into increasing the tax on consumer durable goods, so as to encourage production for export rather than the home market. By 1951, the tax on electric and gas appliances, radio and television sets, and motor vehicles reached 66 2/3 percent. But most Labour members of Parliament (MPs) agreed that, at a time when ownership of motor cars and television sets was still not widespread, this was an imposition “generally speaking . . . on those who are better able to bear it.”^{Footnote 14}

As a result of Labour’s original agitation against a broad-based, flat-rate sales tax and its continuing efforts to make the purchase tax more progressive, the tax had by 1951 become, in the words of one Labour MP, a tax “rising to very high levels on luxury goods and excluding altogether the overwhelming majority of necessity and semi-necessity goods.” Rates ranged from 100 percent on luxury items to 33 1/3 percent on such goods as cutlery, carpets, toys, and nonutility clothing. Meanwhile, utility goods, which continued to be produced under somewhat relaxed specifications, remained tax-free; this covered, for example, about 75 percent of adult clothes, 87 percent of footwear, and 96 percent of wool blankets.^{Footnote 15} In the year ended 31 March 1951, the average purchase tax rate was 39.9 percent on goods constituting about 5.7 percent of GDP. The total yield that year was £303 million, less than the £398 million collected in alcohol taxes and much less than the £1,793 million received from individual and corporate income taxes, but still about 8.1 percent of total tax receipts.^{Footnote 16} Despite its narrow base, then, the purchase tax, like the similarly narrow alcohol and tobacco taxes, was making a minor but still useful contribution to British government finance.

In the United States the excise taxes also flourished in the 1940s because they were selective taxes that primarily hit luxuries. Unlike the British purchase tax, they were not entirely new here. Federal taxes on such goods as automobiles, cameras, jewelry, furs, and selected services had been first imposed during or shortly after World War I and then gradually repealed again during the 1920s, only to be reimposed in 1932 in lieu of the defeated national sales tax. During the New Deal years, many of the less important excises were repealed again, but at the beginning of 1940 taxes on goods (what I shall call “purchase-tax equivalents”)^{Footnote 17} were still being charged at the rate of 3 percent on motor vehicles, 2 percent on auto parts and accessories, 2 1/4 cents per pound on tires, 5 percent on radio and radio accessories and on mechanical refrigerators, and 10 percent on toilet preparations, including cosmetics and perfumes.^{Footnote 18} These rates increased slightly in May 1940, when the first Revenue Act of 1940 imposed a defense surtax of 10 percent on all taxes.^{Footnote 19}

In April 1941 the Treasury Department proposed a large revenue bill to finance the nation’s military defense buildup and to drain excess purchasing power from the economy. The bill included a doubling of most existing excise taxes and a reimposition of taxes on such “luxuries . . . that people could do with less of” as furs, candy and chewing gum, and soft drinks. Treasury officials, desperate to forestall a congressional threat to enact a regressive sales tax for defense revenue, viewed such luxury taxes as “the best defense against a general sales tax.”^{Footnote 20} Two prominent liberal administration officials presented an alternative program to the House Ways and Means Committee, arguing that the tax on automobiles should be increased to 20 percent or even higher.^{Footnote 21} The congressional tax-writing committees eliminated the proposed taxes on candy and soft drinks, and they refused to go beyond the original Treasury proposal of a 7 percent tax on automobiles. But they did agree to a 10 percent retail excise tax on furs and jewelry (including clocks and watches) and a manufacturers’ excise tax of 10 percent on the other luxury goods suggested by Treasury, as well as on household appliances, business and store machines, and other consumer durables. As a result, Congress increased purchase-tax equivalents by $356.5 million per year out of total tax increases of $3,553 million, close to what Treasury had originally wanted and essentially tripling the burden of these selective excises.^{Footnote 22}

But while Treasury kept pushing for further increases in luxury taxes in the later years of the war, Congress (increasingly dominated by an anti-Roosevelt conservative coalition) proved much less receptive. In June 1942, for example, the House Ways and Means Committee again rejected the idea of taxing candy and soft drinks.^{Footnote 23} In the summer of 1943 administration officials wanted to “go the limit” on taxing luxuries in order “to improve the morale of the lower income groups”; as one White House adviser pointed out, the 100 percent purchase tax on luxuries was “one of the most popular taxes in England” and should be copied here.^{Footnote 24} The revenue program submitted to Congress in September 1943 included $694 million of increases in purchase-tax equivalents, including a 30 percent tax on jewelry, 25 percent taxes on luggage (expanded to include handbags and wallets), furs, and toilet preparations, and stiff taxes on soft drinks and candy. This time, the taxes on candy and soft drinks were killed by a 20–0 vote in the Ways and Means Committee, and the other excises (together with one on electric light bulbs) were increased only to 20 percent, providing a mere $197 million in new revenue.^{Footnote 25}

After the war ended, American policymakers, like their British colleagues, concentrated first on reducing the wartime taxes on incomes and profits. By 1950, though, industry pressure for excise tax reductions had become strong enough that President Truman recommended selected excise tax cuts. In an orgy of tax cutting, the Ways and Means Committee proceeded to reduce the revenue from purchase-tax equivalents by more than three times the amount called for by the administration.^{Footnote 26} But then, just after the House had passed the bill, the Korean War intervened. At Truman’s request, the Senate Finance Committee in early August 1950 unanimously agreed to drop all the excise tax cuts and to extend a 10 percent manufacturers’ excise tax to television sets and household freezers.^{Footnote 27} With the need once again arising “both to curtail demand and to raise revenue” for war, the Treasury Department in February 1951 proposed raising the tax on automobiles to 20 percent and on other consumer durables to 25 percent while also broadening the scope of the luxury excises. But Congress, having been quite amenable to administration revenue requests in the first months of the Korean War, now proved unwilling to pass Treasury’s recommendations, consenting merely to increase the tax on cars to 10 percent and on trucks and car parts to 8 percent. The tax on consumer durables was kept at 10 percent, and the broadening in scope of some of the excises was balanced by a narrowing of others. Treasury officials later suspected that Congress rejected their proposals because the feared war-induced shortages in raw materials did not materialize while the bill was under consideration.^{Footnote 28}

Nevertheless, by the end of 1951, the United States, just like Great Britain, had a system of selective excise taxes covering a wide range of luxury goods and consumer durables. The scope of the American system was a bit narrower; it did not include any clothing or furniture, nor the cutlery, carpets, and toys that were subject to the lowest rate of purchase tax in Great Britain. But because durable goods, especially motor cars, were more broadly owned among the much richer American population, the goods subject to purchase-tax equivalents made up somewhere around 7.5 percent of American GDP in 1950/51, a figure larger than the corresponding 5.7 percent for Great Britain. The average tax rate on these goods, though, was only about 8.5 percent, far lower than the 39.9 percent in Great Britain; as a result, the total yield was only $2.1 billion, or 0.64 percent of GDP, roughly one-quarter the British figure. This was not for lack of trying: at various points during both World War II and the Korean War, the Treasury Department had advocated rates ranging from 20 percent to 30 percent on both consumer durables and luxuries as well as the inclusion of candy and soft drinks, and had failed only due to the repeated unwillingness of Congress to follow its lead. Still, the purchase-tax equivalents generated about 4.5 percent of total federal tax revenues in 1950/51 and thus, like the British purchase tax, made a minor but still useful contribution to government finance.^{Footnote 29}

The nature of the British purchase tax and its American equivalent as highly progressive luxury taxes enabled their adoption or expansion in political cultures that were susceptible to the rhetoric of “soak-the-rich” taxation. But the narrow base and highly discriminatory rates of these taxes also presented a political liability, as they motivated affected merchants and customers to protest their imposition and as tax collectors found the many fine distinctions between taxable and nontaxable goods to be difficult to enforce—a problem that also plagued the income tax with its highly progressive rate structure and many exemptions and loopholes. In the case of the income tax, these weaknesses would eventually lead Treasury officials in the United States to spearhead a comprehensive tax reform in the mid-1980s that lowered rates and broadened the base.^{Footnote 30} But in the case of the luxury sales taxes, it was only British officials who pursued reform. As early as 1948, Customs and Excise officials there had worried that “unless we make adjustments from time to time the continuance of the tax as a major source of revenue is endangered.” Their solution was not a root-and-branch replacement of the existing system with a VAT, as demanded by business interests and officials within the Board of Trade (the British equivalent of the Commerce Department).^{Footnote 31} Instead, together with their colleagues in the Treasury Department, they concluded that it was best “to proceed by evolution and not revolution” in gradually strengthening the purchase tax by reducing and simplifying its rates and broadening its base of taxed goods. But implementing such a strategy would require patience and opportune political conditions—which did not exist as long as a Labour government insisted on keeping the purchase tax as an increasingly narrow levy on luxuries.^{Footnote 32}

The first opportunity for base broadening came in late 1950, when the Board of Trade pointed out that the exemption of utility goods from purchase tax violated Great Britain’s international trade treaty obligations. The solution they devised in conjunction with Customs and Excise was to remove the exemption for utility goods and instead reduce the tax on each class of clothing and furniture by a fixed amount designed to leave the less-expensive goods (both domestic and imported) tax-free. This scheme proved unacceptable to Labour ministers, who did not want to see any utility goods bearing a tax, however small. But the political obstacles disappeared with the Conservative election victory in late 1951, and the new scheme was promptly implemented in the first budget of 1952.^{Footnote 33} Another opportunity for base broadening came in 1955, when a run on sterling forced the chancellor to introduce a deflationary supplemental budget. He implemented a couple of purchase-tax provisions that had been repeatedly urged by Customs and Excise officials: he removed the fixed deductions for clothing and furniture that had discriminated in favor of cheap goods (compensating by reducing the overall purchase tax rates to 5 percent for clothing and 10 percent for furniture), and he also made the whole group of kitchenware, tableware, and other household goods (commonly called “pots and pans”) once again subject to purchase tax.^{Footnote 34} A final base-broadening came in 1961, when yet another chancellor seeking revenue for a deflationary budget adopted the persistent suggestion of Customs and Excise to extend purchase tax to soft drinks, candy, and ice cream.^{Footnote 35}

Together with base broadening came a reduction in rates. There had been a general one-quarter cut in the purchase-tax rates in the 1953 budget, made possible by the easing of international tensions after the end of the Korean War. Thereafter, Customs and Excise pushed for cuts targeted preferentially at the higher rates, so as to narrow the discrimination between luxury and other goods and to help out specific industries suffering from particularly high rates. At the beginning of 1954, jewelry and silverware as well as electric heaters were moved from the 75 percent rate to 50 percent; a year later the fur industry was accorded the same treatment.^{Footnote 36} In 1958, the rate structure was simplified to one of 5 percent for clothing and furniture, 15 percent for pots and pans, 60 percent for cars, radio and television sets, and toilet preparations, and 30 percent for all other taxable goods. A year later, the top three rates were reduced to 50 percent, 25 percent, and 12.5 percent, while the bottom rate stayed at 5 percent.^{Footnote 37} In spring 1962, the chancellor, following his officials’ advice, moved further along the path of rate consolidation “to make the tax more sensible and less discriminatory” by combining the two lower rates of 5 percent and 12.5 percent into a single 10 percent rate while reducing the top rate of 50 percent to 45 percent.^{Footnote 38} His successor in November 1962 announced his intention to cut the rate on motorcars to 25 percent to aid the ailing automotive industry. Representatives for the television manufacturers and other producers subject to the 45 percent rate quickly pressed for cuts as well; bowing to this pressure, the chancellor at the beginning of 1963 announced the effective abolition of the 45 percent rate.^{Footnote 39}

By 1963, then, the Conservatives, at the continuous urging of Customs and Excise officials, had step-by-step converted the purchase tax into a broader tax, with a fairly low rate of 10 percent for such everyday goods as clothing, furniture, and household implements (and 15 percent on sweets) and a somewhat higher rate of 25 percent on a wide variety of consumer durables and luxury or discretionary goods. The coverage of the tax had been nearly doubled to goods representing about 11 percent of GDP, while the average tax rate had been cut to about 16 percent. The tax in 1963/64 still raised 8.5 percent of total taxes, marginally more than in the early 1950s, while imposing a burden of 1.8 percent on GDP, somewhat less than at the beginning of Conservative rule.^{Footnote 40} The Labour front bench had loudly protested each step in this process, complaining that it represented a move “to the more reactionary system of taxation which prevails on the continent of Europe” that ignored “the capacity to pay,” but had been powerless to stop it.^{Footnote 41}

In the United States, though, there appears to have been no plan by policymakers to strengthen the existing excise tax system by broadening its base. During 1953 there were some reports that Treasury might present plans for expanding the scope of excises, a move supported by the Republican House majority leader, but I have found no evidence that such plans were ever finalized.^{Footnote 42} In fact, the Treasury Advisory Staff member most responsible for shaping excise tax policy, John Copeland, appears to have disliked indirect taxes. During the Korean War he argued that tax increases should be derived primarily from income taxes, with only alcohol and tobacco taxes contributing from the excises; and in 1962, when he was free again under a Democratic administration to voice such opinions, he stated that excise taxes were regressive, beset with administrative problems, and distorted business patterns; in contrast, in his opinion “income taxes are the best taxes because they are most closely related to ability to pay.”^{Footnote 43} During World War II, such views had been kept in check because the administration considered luxury excise taxes to be still preferable to the general sales tax that some congressional leaders advocated as a war revenue measure. But with the threat of a general sales tax now gone, American Treasury officials in the 1950s, unlike their British colleagues, were not particularly concerned to preserve the excise taxes as part of the federal fiscal system.

In the absence of Treasury Department interest in the issue, an impetus for excise tax strengthening could still have come from Congress. After the 1952 election, both houses of Congress had a Republican majority that could be expected to be more sympathetic toward consumption taxes than the previous Democratic majorities. There was in fact a modicum of rate flattening during the two years the Republicans were in control, which coincided with a period of significant decline in military expenditures after the Korean War ended. In April 1954, the increase in the automobile tax to 10 percent that had been imposed during the Korean War was set to expire. In exchange for a one-year extension of this higher rate, the Republican majority in Congress pushed through a permanent reduction of all other excise tax rates that exceeded 10 percent, with those on appliances being cut to 5 percent.^{Footnote 44} Once the tax-cutting fever subsided, Congress routinely extended the 10 percent temporary rate on cars each year until 1964 at the request of Presidents Eisenhower and Kennedy, who both argued that the revenue was needed to balance the budget.^{Footnote 45}

There was, however, essentially no base broadening to accompany the rate reductions. In late 1955, the House Ways and Means Committee, now back under Democratic control, set up a subcommittee to study the excise taxes, but it recommended mainly technical changes of an administrative nature. In February 1956, the subcommittee, acting on suggestions of congressional staff, did recommend that the manufacturers’ excises be extended to cover certain new products: garbage disposal units, wire and tape recorders, record players, and transistors and tubes. Congress did not get around to enacting the subcommittee’s recommendations until August 1958, and by that time wire and tape recorders as well as transistors and tubes had been dropped from consideration.^{Footnote 46} After this decade of legislative stasis, the purchase-tax equivalents in 1963/64 yielded $3.7 billion, about 0.55 percent of GDP and representing about 4.1 percent of federal tax revenues exclusive of payroll taxes—figures only slightly lower than at the beginning of the 1950s. Measured as a percentage of total taxes, they still brought in about half of what the British purchase tax did. But the American system was now less robust than the British one. The yield now represented an average tax of about 9 percent on goods representing about 6 percent of GDP, a slightly higher rate on a slightly narrower base than in 1950/51, and a much narrower base than the British one in 1963/64.^{Footnote 47}

In the mid-1960s, the fate of the two tax systems diverged sharply, as the American excise tax system was eviscerated while the British purchase tax remained in place and ultimately served as the vehicle through which a VAT was introduced. The purchase tax persisted because the Labour government that came to power in October 1964 never got the chance to reduce it, even though Labour’s front bench had persistently opposed the tax’s transformation in the 1950s and early 1960s. Upon taking office, the new government was faced almost immediately with a currency crisis caused by a deteriorating balance of payments and an overheating economy. Over the next five years, it would repeatedly resort to steep tax increases in an effort to dampen consumer demand. Chancellor James Callaghan, despite suggestions otherwise from Treasury officials, at least did not increase purchase tax rates until July 1966.^{Footnote 48} By that time he had already increased income taxes and introduced a series of new taxes, including the Selective Employment Tax (SET), a payroll tax effectively imposed only on companies in service industries, which proved quite unpopular.^{Footnote 49} Roy Jenkins, appointed as chancellor after Great Britain was finally forced to devalue sterling in November 1967, introduced even sterner measures to deflate the economy and put it on a more sustainable path, increasing purchase tax rates in both of his 1968 budgets and also reinstating a special rate of 50 percent for selected luxuries. In a final bout of deflation in April 1969, Jenkins expanded the purchase tax to cover potato chips and salted or roasted nuts as well as prepared pet foods.^{Footnote 50}

After the British economy finally stabilized enough in 1970 to allow tax cuts, Jenkins, like the first postwar Labour government, turned first to reversing some of the income tax increases that had been imposed earlier. But it is conceivable that in a subsequent budget he might have cut purchase tax as well, especially in the lowest rate; left-wing Labour MPs demanded such a move as part of a truly Socialist budget.^{Footnote 51} After a surprise election defeat in June 1970, though, Labour was replaced by the Conservatives, who had promised to repeal SET and to consider replacing purchase tax with a VAT. Policy experts within the Conservative Party during the late 1960s had swung toward favoring a VAT, in part because adoption of such a tax would eventually be required by European rules if Great Britain joined the European Economic Community (as it did in 1973), but also because it was broader based and less distortive of the economy than the purchase tax. In March 1971, Conservative chancellor Anthony Barber finally announced that VAT would replace both purchase tax and SET two years hence; in the meantime, to sweeten public opinion, he reduced purchase-tax rates in two steps so that by March 1972 the top rate stood again at 25 percent. The initial tax rate for the VAT was set at 10 percent, designed to produce no more revenue than the purchase tax and SET had done. Because the VAT merely replaced previously existing and (in the case of the SET) quite unpopular taxes, its introduction evoked relatively little opposition; for the same reason, it also failed to become a rallying point for those opposed to joining Europe. If the purchase tax had not existed, it is quite conceivable that popular opposition to the imposition of a broadly regressive tax would have led to calls either to modify European tax rules or to stay out of Europe entirely.^{Footnote 52}

In the United States, though, the excise tax system did not survive the 1960s because the American government, at least until 1966, did not face the same pressure as the British one to restrain an overheating economy. As a result of tight fiscal policies during the second half of Eisenhower’s presidency, inflation remained subdued throughout the early 1960s, and the Kennedy administration adopted a policy of cutting taxes to stimulate growth in an economy that seemed to be performing at less than its potential. Deep within the Treasury bureaucracy, John Copeland argued in the spring of 1962 that reduction of the burdensome excise taxes should be part of any tax-cut program. But Kennedy, just like Congress in 1945 and 1947 and like the Labour chancellors in 1945/46 and in 1970, chose to concentrate first on income tax reductions, proposing a targeted investment tax credit that was enacted in 1962 and then a massive rate cut that, after his assassination, was pushed through Congress by President Johnson in early 1964.^{Footnote 53} By the summer of 1964, though, sentiment within the administration was shifting toward cutting excise taxes as well. In late July 1964, Walter Heller, the expansionist chairman of the Council of Economic Advisers, urged an excise cut timed for late 1965 to provide additional stimulus to a potentially flagging economy, while Treasury Secretary Douglas Dillon recommended that the Democratic platform include an excise tax reduction in 1965 to get the unemployment rate down to 4 percent. In an election speech to a cheering union convention, Johnson in late September committed himself to an excise tax cut in 1965.^{Footnote 54}

Even before the election, Treasury officials were already thinking of eliminating all of the minor excise taxes immediately and then gradually reducing the two largest of the miscellaneous excises, those on cars and on telecommunications, in a program ultimately costing perhaps $4 billion. Despite vigorous support for such a package from his gung-ho economic advisers, Johnson, eager to show a projected deficit for 1965/66 lower than that for the previous year, would agree in January 1965 only to a $1.75 billion package.^{Footnote 55} But by May 1965, the budget picture had improved significantly, with the 1964 income tax cuts having given a greater boost to the economy than expected. Moreover, extra fiscal stimulus now appeared necessary to offset the dampening effect of a payroll tax to be imposed in 1966 to pay for the new Medicare program. As a result, Johnson now recommended the full $4 billion program to Congress.^{Footnote 56} Congress immediately went further than Johnson had intended: while the president had suggested that the automobile tax be eventually fixed at 5 percent because it was “not regressive” and its “compliance and collection costs are exceptionally low,” the House of Representatives voted to abolish it by 1969. After considerable lobbying in the Senate, the administration was able to salvage only an ultimate tax of 1 percent on automobiles.^{Footnote 57}

The Excise Tax Reduction Act of 1965 passed just in time. An earlier effort by Congress to slash excise taxes in 1950 had been cut short when the Korean War broke out before the Senate could concur in the House of Representatives’ cuts. But this time around, it was not until December 1965, several months after final action had been taken on the tax reduction bill, that ballooning military expenditures in Vietnam and rising rates of inflation started to cause alarm among Johnson’s economic advisers. Once the president’s team realized that the economy was overheating, it moved quickly to halt any further tax reductions. In early January 1966, Treasury Secretary Henry Fowler recommended that the excise tax rate on cars, which had just dropped to 6 percent, be restored back to 7 percent and then frozen there. This provision of the Tax Adjustment Act of 1966, passed in mid-March, evoked surprisingly little protest even from the automobile industry.^{Footnote 58} Moreover, Congress willingly and with little discussion repeatedly extended the freeze on the automobile excise tax, which had initially been limited to two years.^{Footnote 59} Given how readily both the administration and Congress held the line on this tax while struggling with an overheating economy in the late 1960s, it is quite likely that the Excise Tax Reduction Act of 1965 would not have passed if the inflationary effects of spending for the Vietnam War had become apparent a year earlier.

With the inauguration of Richard Nixon in early 1969, officials interested in relying more on indirect taxation finally began to enter the Treasury Department. During the first term of Nixon’s presidency, the Treasury repeatedly studied the possibility of introducing a VAT, at just the same time as similar discussions were going on within the Conservative Party’s policy circles in Great Britain. But in the American case, the excise tax system had already been gutted by the tax cuts of 1965, so that there was no longer an existing system of selective sales taxes that could be reformed into a VAT. Moreover, while the British payroll tax imposed in 1966, the SET, had proved to be a highly unpopular one that could be easily replaced with the VAT, its American equivalent, the Medicare tax imposed the same year, had been much better designed and proved to be politically unassailable. Hence, the Nixon administration ended up not proposing a VAT.^{Footnote 60} Nixon’s interest in broad-based consumption taxes, however, preceded his election in 1968; as early as September 1958, while vice president under Eisenhower, he had endorsed proposals by the National Association of Manufacturers and other conservative business groups to institute a national sales tax in order to reduce incentive-killing income and profits taxes.^{Footnote 61} It is at least conceivable that, if Nixon had won the close presidential election in 1960, policymakers interested in a sales tax or VAT might have entered the Treasury Department already in the early 1960s and started working like their British colleagues to transform the existing amalgam of excise taxes into a broader consumption tax, thereby preventing it from being eviscerated.

But Nixon lost the 1960 election, and the Democratic administration that governed for the next eight years enjoyed just long enough a period of low inflation and anemic economic growth to allow the federal excise tax system to be slashed in 1965. The final deathblow to the excise taxes came in August 1971, when Nixon, as part of a larger economic stimulus package designed to boost his reelection chances, decided to eliminate the lone remaining tax on automobiles, thereby aiding domestic car manufacturers, who had been unable to compete with smaller and cheaper imports.^{Footnote 62} Thereafter, the only federal excises on goods other than alcohol and tobacco would be those earmarked for special purposes, such as the taxes on trucks and tires that even today still flow into the Highway Trust Fund.^{Footnote 63} Sales taxes for general-fund purposes would now be a matter strictly for the states, which had vigorously expanded their retail sales taxes in the late 1960s to fill the void left by federal withdrawal from the field.^{Footnote 64}

Historians seeking to explain why the United States does not have a federal sales tax or VAT today have tended to focus on the dramatic congressional rejection of national sales tax proposals in 1932 and 1942 and have concluded that the preference for a strongly progressive tax system evinced in those battles foreclosed the possibility of a broad-based national consumption tax. This conclusion, however, sells short the potential that still inhered in our progressive tax system. Just as in Great Britain, which also had elaborated a similarly progressive tax system, there actually did develop a system of national sales taxes in the 1940s—not a flat-rate general sales tax, but rather a progressive tax on luxuries, which was the preferred alternative of those politicians in both countries who rejected more regressive taxes. And in Great Britain, this tax would eventually become the vehicle through which a VAT was introduced in 1973—a trajectory toward a broad-based consumption tax that was at least potentially still available in this country as well until 1965.

The American excise tax system was admittedly somewhat weaker than the British purchase tax. Due to congressional resistance to administration tax proposals during both World War II and the Korean War, the American tax rates were significantly lower than the British ones, making the excises a somewhat less fruitful tax and thus a more inviting prospect for elimination by tax cutters. More significantly, the American excises were neglected during the 1950s. British Treasury officials, concerned to maintain as broad a revenue system as possible, during this time worked with a sympathetic Conservative government to transform the purchase tax into a somewhat broader tax with lower rates, thereby making it stronger politically. Their more progressively inclined American colleagues, though, had only an instrumental interest in excise taxes—enthusiastically promoting them in the 1940s when they seemed necessary to ward off the threat of a general sales tax, but then ignoring them in favor of the income tax once that threat had subsided in the 1950, thereby allowing the excises to remain narrowly based taxes susceptible to attack by affected interests. Nevertheless, as long as American administrations kept a tight fiscal policy during the 1950s and early 1960s and thus still needed the revenue generated by the excises, the American excise tax system with its transformative potential remained in place.

In the mid-1960s, though, the fate of the two taxes diverged sharply. In Great Britain, the purchase tax survived a period of Labour rule that was marked by a nearly unbroken series of economic emergencies and thus remained available in the early 1970s to be converted rather painlessly into a VAT by yet another Conservative government. But in the United States, Democratic administrations of the early 1960s enjoyed just long enough a period of benign economic conditions, and reaped enough fiscal benefits from the income tax cuts of 1962 and 1964, that President Johnson was unable to resist the pressure from both Congress and his own economic advisers to eviscerate the excise taxes. As a result, when more conservative officials arrived at the Treasury only a few years later who were interested in a broad-based national consumption tax, they no longer had available to them the kind of preexisting tax that proved necessary elsewhere in the Anglophone world for easing the introduction of a VAT.

The progressive tax system established in both the United States and Great Britain in the early twentieth century thus was not barren ground for a broad-based consumption tax. To be sure, other tax systems, such as those in France, were far more fertile soil, but even the British and American systems contained within them the seeds for a VAT, in the form of a progressive sales tax on luxuries that could be transformed into a much broader levy. In order to understand why there is no federal sales tax or VAT in the United States, then, we need to pay attention not just to the policymakers of the Progressive Era and the New Deal who established our progressive tax system, but also to the postwar American liberals who failed to nourish the tender shoots of the excise tax system and finally trampled it underfoot in 1965.