Pethokoukis, Economics, Taxes and Spending

When Democrats finally propose a VAT, it’ll probably look like this

A $2 trillion proposal from William G. Gale and Benjamin H. Harris, via The Hamilton Project at Brookings:

We propose a value-added tax (VAT) to contribute to the U.S. fiscal solution. A 5 percent broad-based VAT, paired with subsidies to offset the regressive impacts, could raise about 1 percent of GDP, or about $160 billion, per year. Although it would be new to the United States, the VAT is in place in about 150 countries worldwide and in every non–U.S. OECD country. In recent years, the VAT has raised about 20 percent of the world’s tax revenue (Keen and Lockwood 2007).

This experience suggests that the VAT can raise substantial revenue, is administrable, and is minimally harmful to economic growth. Additionally, the VAT has at least one other potential advantage worth highlighting: a properly designed VAT might help the states deal with their own fiscal issues. Although a VAT would be regressive relative to current income, this regressivity can be easily offset by transfers that would make the net burden progressive. A VAT should only be imposed after the economy has returned to full employment, as the depressing effects of increased taxation in a demand-driven economy would suppress the economic recovery.

This would basically add a full percentage point — for starters — to federal revenue as a share of GDP. The problems with the VAT aside, I am particularly uninterested in the idea without seeing what the accompanying changes to the income tax code would look like. In general, I am more interested in complete replacement options.

6 thoughts on “When Democrats finally propose a VAT, it’ll probably look like this

  1. If the experience of other countries teaches us anything, it’s that a VAT proposal is not going to provide complete replacement – but it’s going to give the extra tax revenue you yourself have admitted is necessary in a minimally damaging way.

    Keep in mind that this is true even for parliamentary systems where large-scale overhauls of the tax code are much, much easier.

    And given the difficult politics and comparatively radical nature of a VAT, I don’t see it as some way to kick the can on base-broadening, rate-lowering tax reform. A VAT is not going to get introduced before legislators have looked at the mortgage-interest deduction etc.

  2. A VAT in exchange for tax reform with no additional revenue to pay down the debt?

    when do we pay down the debt and how?

    this is nutty.

    we’ve run up this huge debt. We’re beating the current POTUS over the head about it – and there are no plans to actually deal with it other than the POTUS who wants the revenue from tax reform to pay it down.

    Makes me wonder why the folks who want to change the tax code and cut taxes are serious about the debt at all.
    they just act like it’s not there.

    • “We’re beating the current POTUS over the head about it – ”
      Well, he’s busy beating the GOP over the head about the sequester(aka deficit reduction.)

      “and there are no plans to actually deal with it other than the POTUS who wants the revenue from tax reform to pay it down.”

      Where’s that plan Larry? Where’s his projections for a surplus to pay down the debt?

  3. A consumption tax code in place of the income tax,estate & capital gains has the potential to get America out of our over reliance on consumption.Plus a consumption tax is the only tax that can get revenue from the enormous US underground economy,drug dealers,prostitution,under the table wages etc.The VAT tax has some adherence problems,in some European countries I’ve heard the final tax on the sale part of a VAT can be manipulated.

  4. Why am I not suprised that the clique of clowns at the Brookings would embrace more socialist crapola instead of considering the K.I.S.S. theory?

    Why not embrace the idea of cutting out all entitlements for five to ten years instead?

    Maybe the Brookings bunch could use some new reading material

  5. A V.A.T. hides the true cost of government where the Fairtax is paid in full at the final consumer level. One complaint about the Fairtax is that it is too high. That is the true cost of government.

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