Is VAT Something You Might Be Interested In?

The value-added tax is so hot right now. Alan Greenspan would like a VAT to close the deficit. Nancy Pelosi is open to VAT as part of overhauling our tax code. But why would a Democratic Congress ever pass a new general tax on consumption? Republicans would eat their 2010 seats for breakfast.

To answer that question, the Atlantic's Clive Crook tracks down this Washington Post column by Henry Aaron and Isabel Sawhill called Bend the Revenue Curve. Crook is right: This is a really great column:

So here is what we propose: Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public health-care spending through a newly created health-care trust fund. The trust fund would pay for all federal health-care spending. This framework would mean that Americans would get the health care they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending.

By balancing revenue and health-care spending, such a reform would help solve America's long-term fiscal problems. In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the health-care cost curve, because measures to slow the growth of health-care spending would avoid unpopular future tax increases that would otherwise be necessary.

Great stuff. To Republicans who will invariably say "You can't raise taxes during a recession!" (although that "during a recession" part is only a recent postscript), VAT supporters could say: We're not. We're implementing the VAT only when unemployment drops under X percent, long after the recession is over. Furthermore the knowledge that taxes on consumption are going up might encourage Americans to buy more now -- perfect nudge.