“The intergenerational distribution of the burden of a VAT would work to offset the distributional effects of the federal entitlement programs that disproportionately benefit the elderly. Because a value-added tax is a consumption-based tax, it is economically equivalent to taxing the sum of current labor income plus one’s existing stock of wealth or savings (that’s what can be used to purchase goods and services). Economists like the tax on existing wealth for efficiency reasons, because it amounts to a “lump-sum” tax that doesn’t distort economic behavior……A tax on wealth tends to burden the rich more than the poor, which might seem fair, but it also tends to burden the old more than the young, which might not seem fair–in isolation at least. Tax policy experts have traditionally grappled with this intergenerational burden of consumption taxes in the context of replacing the income tax with a consumption tax–in which case it does seem unfair for a person entering or in retirement, who paid income taxes on his/her labor income over an entire career with the expectation that their income tax burden would go down in retirement (as his/her income would go way down), to suddenly be taxed on his/her consumption (which may remain just as high or higher in retirement compared with in working years).
Tax economists have called this a “transition cost” of switching to a consumption tax, and have often concluded that “transition relief” would have to shield the elderly from this tax on existing wealth, which unfortunately would chop the tax base way down and get rid of its most efficient component. But in the case of an add-on VAT, this fairness concern seems less concerning, especially given what the VAT would fund (health benefits that disproportionately benefit the elderly) and why that additional revenue is needed (because existing entitlement programs which disproportionately benefit the elderly are on an unsustainable path)…
…(E)xperts seemed to conclude this was an advantage, not a disadvantage, of the VAT (add-on or not)–that it would help alleviate the current intergenerational skewness in the net benefits of federal government programs, as well as which generations (younger ones) bear the burden of the debt.
But the number one reason why to like a VAT is still because there aren’t really any better ideas about how to raise more revenue, and not raising more revenue is not an option.”