Squaring America's fiscal circle

My new column for the FT advocates a value added tax. This is how it winds up:

The challenge is to flip the all-party, pro-spending, anti-tax coalition. One way might be to link specific spending more closely with specific taxes. The question to ask voters is not whether they want guaranteed health insurance, which they do, and higher taxes, which they do not. It is whether they are willing to pay higher taxes for guaranteed health insurance.

Slowly, very slowly, interest in a US value added tax is spreading beyond public-finance academics. Comeback America, an excellent new book by David Walker, formerly US comptroller-general and until 2008 head of the Government Accountability Office, includes this among its recommendations. The purpose is partly just to raise money. The book argues that tax increases and spending cuts will both be needed, and the hollowed-out US income tax system cannot deliver. If a VAT were tied to public spending on health, however, it would do more than raise money.

Unlike income tax, which more than 40 per cent of Americans no longer pay, a VAT would ask everyone to pay something. No part of the electorate could vote for guaranteed health insurance entirely at other people's expense. Some Democrats would recoil at this idea, but there is something in it for them: revenue to support the services they value.

An idea like this needs a champion. Mr Obama would be ideal, but seems unlikely to step forward. Most likely, the existing coalition would prevail, Democrats denouncing an unfair regressive tax, and Republicans opposing any kind of tax. But maybe, just maybe, Democrats could see a way of supporting needed public services. And perhaps Republicans, searching deep into their collective memory, could find a trace of the fiscal conservatism they once represented, and regard a modest broad-based VAT as the lesser evil.

If not, there is always going bust.

I interviewed David Walker, mentioned above, for a book-launch event at the Aspen Institute last week. There's a video if you are interested.