Thursday, May 28, 2009

VAT plus 

While I was a graduate student I was a "gopher" for a conference on Reaganomics. One of my assignments was to drive Jerry Jordan, then a member of the Reagan Council of Economic Advisers, to the airport after his speech. I had decided that as part of my job I should try to know something about each person I was driving around, have some questions prepared. The value-added tax was a topic at that time, so I asked him whether the Council was doing any work on VAT. His reply was no, because while there might be some sympathy for it within the administration, they would only propose it as a substitute for the income tax. Their fear, he said, was that Congress would use it as a complement to the income tax.

He was just off by 27 years or so...

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

(h/t: Andy.) As a substitute, the VAT has advantages and disadvantages. Technically, VAT works like a tax on production: the amount of GDP produced in an economy is equal to the value added by humans at all levels of the production process. since in the aggregate total production should equal total income

VATs tend to be rather messy in practice; many flat tax proposals have descended from the original Hall-Rabushka tax plan from the early 1980s. (It was, in fact, part of the discussion at the Reaganomics conference.) William Gale from the Urban Institute has a short primer. One should note that flat tax, VAT and the Fair Tax are three entirely different proposals. But unlike the other two, the proposal of VAT here would be a complication of the tax system that doesn't create any tax reform. There is unlikely to be any tradeoff of income for VAT, since it appears the reason the Obama administration is exploring it is to get additional revenue.

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