Value Added Tax (VAT) Coming Soon?

President Obama added Alan Krueger as a top White House administration post today. Click Here

Here is Krueger’s article on a VAT from a few years back…

SOURCE: THE NEW YORK TIMES 

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Any casual observer knows the United States faces enormous economic challenges in both the short and long run. These challenges — and the respective solutions that are being discussed — are somewhat in conflict, though.

On the one hand, the economy is contracting, people are cutting back on their spending and the economy faces a possible downward spiral with fear of job loss, causing consumers to spend even less, which in turn would cause more job loss — the so-called paradox of thrift. On the other hand, Americans save very little, critical infrastructure has been neglected, and the president-elect warned of government deficits in the trillion-dollar range for years to come.

Efforts to spur short-run consumption can worsen the long-run problems by increasing the government budget deficit and depleting personal savings.

Here is a suggestion to address both the short-run and long-run problems. I pose it only as a suggestion for serious discussion; I’m not sure it is the best way to go. But here goes: Why not pass a 5 percent consumption tax to take effect two years from now? There are many different ways to implement a consumption tax, but for simplicity think about a national sales tax.

In the short run, the anticipation of a consumption tax would encourage households to spend money now, rather than after the tax is in place. Along with the rest of the economic recovery package, this would help jump-start spending in the economy and thereby increase production and employment.

In the long run, a 5 percent consumption tax would raise approximately $500 billion a year, and fill a considerable hole in the budget outlook. In addition, a consumption tax would encourage more saving in the long run. Manyeconomists consider a consumption tax an efficient way of raising tax revenue, especially in a global economy. The prospect of greater revenue flowing into federal coffers would probably help lower long-term interest rates because the government would need to borrow less down the road, and further bolster the economy.

The main downside of this proposal is that taxes reduce economic activity. But the government must make critical trade-offs, and a consumption tax could be the most efficient means to raise revenue to finance essential government functions. Over time, if the budget picture improved, income taxes or corporate taxes could be reduced and the revenue replaced by the consumption tax.

Another downside is that a consumption tax is a greater burden for the poor, who spend a relatively high share of their income. But this can be compensated by exempting essential items, like rent and nutritious, or by providing a rebate to low-income households.

This analysis only scratches the surface. As I said, I propose the idea only for discussion at this stage, but it is worth considering. What do you think?

 

 

 

 

 

 

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