VAT Would Be Nice, but It's Not Magical
The VAT may resolve the debt crisis, but for politicians it's too soon to be right.
That's the headline of this David Ignatius piece in the Washington Post suggesting that the value-added tax is an idea before its time. Perhaps. But he writes:
By ruling out a VAT when it could keep the federal deficit in check, politicians have all but guaranteed that the debt crisis, when it comes, will be more damaging. But by then, everyone will be clamoring for a VAT, so it will be safe to endorse it.
The value-added tax could be an effective revenue-generator and tax-code-transformer, but this language is a bit strong. The VAT isn't some uniquely magical elixir to deficititis. It's just an efficient tax. Politicians could introduce it at a revenue-neutral level (you could off-set a first-year rate of 5% with reductions to corporate or income taxes) and then scale it up to 10% in the next few years as the economy gained steam, at which point it would start making real money.
But VAT-or-bust is overstating the case a bit. Repealing the Bush tax cuts for more than the top 5% sometime in the next five years could save more than $100 billion annually. Broadening the tax base by eliminating tax expenditures would save the government a slice out of the $900 billion of cash it passes up each year. Not to mention a carbon tax, defense cuts, Social Security means-testing, PAYGO, Medicare reform ... the list goes on. If we focus on one item to the exclusion of all else, we'll fail to appreciate the unique opportunity of a deficit commission which is to evaluate the entirety of our Rube Goldberg tax system and skewed spending preferences. In the long term, medical inflation matters much more than any other thing. In the short term, all those other things should be on the table.