Value-added tax: Best way to cut the deficit?

I smell a VAT, said Catherine Rampell in NYTimes.com. In a recent interview, President Obama wouldn’t specifically rule out a value-added tax as one tool to help balance the federal budget. No surprise there. Because of long-term deficits, the VAT is gaining traction among economists and budget experts. Well-established in Europe and Canada, the VAT taxes consumption, taking a share of the value added at each stage of manufacture and sale, “from raw material to a consumer’s shopping bag.” But that’s not why the VAT’s so hot, said Dale McFeatters in The Providence Journal-Bulletin. The VAT possesses one “surpassing advantage” over all other potential debt remedies: It “generates an absolute ton of cash”—hundreds of billions of dollars per year.

So the big spenders tell us, said Robert J. Samuelson in The Washington Post. What they don’t say is that a VAT would create a “staggering” new tax burden without addressing the real problem: runaway spending. In 1970, Social Security, Medicare, and Medicaid constituted 20 percent of the federal budget; now these entitlements consume 43 percent. Meantime, defense spending has been steadily rising since 9/11. As baby boomers retire and entitlement spending grows, a VAT cannot “painlessly” cover these soaring costs. Food would likely be exempted, so the tax would probably need to be as high as 16 percent, and would fall on all discretionary spending—“cars, televisions, airfares, gasoline.” Are more taxes and more government spending really what this country needs?

What America needs is about $1 trillion a year, said Bruce Bartlett in Forbes. That’s the gap between what the U.S. government spends and what it takes in, and the reality is that Congress is not going to make massive cuts in defense spending or the benefits of the nation’s most powerful voting bloc, the elderly. So if a balanced budget is truly a goal, taxes must rise, and the only question is—whose? The VAT affects the poor and lower middle class disproportionately, because they spend more of their income on consumer goods, but it’s not unreasonable for these folks—who pay no income tax—to contribute to our national defense. And a VAT is preferable to “economically debilitating” increases in income taxes, which would smother growth. If you prefer a “fantasy world,” by all means insist on balancing the budget through massive entitlement cuts. If not, the VAT is the only sane alternative.

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