Adding a VAT

Josh Barro has a piece in favor of a Value Added Tax in Bloomberg. A VAT is a tax levied on business sales minus their inputs or costs, so all companies ‘adding value’ along the production chain pay the tax, but it is collected at the sale of the final consumer good. If you buy a sweater for $50 and the VAT is 10%, $5 of the $50 is the VAT.

In my book Balancing the Budget is a Progressive Priority, I didn’t suggest that we add a VAT, but I do think that it will take a substantial increase in tax revenue as a percent of GDP to ever have a balanced budget again. I suggest 21% of GDP, which is about 3 percentage points higher than the 40 year average, a level that is doable, but won’t be easy. Would a VAT be useful to consider? A key question, and a few thoughts.

  • Is the VAT viewed as a supplement to our current system of taxation (payroll taxes, personal and corporate income, excise taxes) or a replacement of some portion? I asked Josh Barro via twitter for his views, and he said he viewed the VAT as supplementing our current federal taxation regime, shown below. Individual income taxes and payroll taxes are the largest source of federal revenue, with corporate and excise taxes being much smaller (in percent of GDP terms).

Continue reading “Adding a VAT”

The most important tax reform decision

(This is cross posted at Don Taylor’s freeforall blog).

The most important tax reform decision is deciding to collect enough revenue to pay for the spending that the nation plans to undertake.

This basic decision is often lost in the discussion of other (important) issues: marginal rates, tax expenditures, the Buffet rule/fairness, changes in the mix of taxes used to collect revenue, impact on the economy, etc. There are many key decisions to be made if we are to transition toward a sustainable federal budget, but most fundamentally, we must decide what proportion of GDP will be redistributed via government expenditure, and then develop a tax code that can collect the amount of revenue necessary to pay for such spending.

Continue reading “The most important tax reform decision”