Primers on VAT

So far as taxes and public spending are concerned, the US has been singular in two respects. It has not provided a public guarantee of health insurance, and it has not collected a value-added tax. This pairing of exceptions is no coincidence. Now that the first has been (mostly) legislated away, time may be running out on the second. With recent celebrity endorsements from the likes of Paul Volcker and Alan Greenspan, the idea of a VAT is gaining momentum, and opponents are gearing up to oppose it.

This primer on VAT from Robert Carroll and Alan Viard (h/t Greg Mankiw) is useful and even-handed. If you need to collect revenue, it says, a VAT is a good way to do it. Once it's there, on the other hand, you can raise it rather too easily to collect even more. That is something for conservatives to worry about. Liberals are more concerned about regressivity. A VAT exempts new savings, so the rich pay proportionately less. There are ways to mitigate that drawback, according to the Tax Policy Center's Eric Toder and Joseph Rosenberg. Payroll taxes are more regressive than a VAT. Using a VAT in part to substitute for payroll taxes could make the system as a whole more progressive.

Another paper by the TPC asks whether the present income tax code is capable of bridging the fiscal gap by itself. The answer is no, certainly not if tax increases were confined to the highest-paid households, as Obama has promised. Spending cuts and new revenue sources are going to be required.