Toder, Eric, Jim Nunns and Joseph Rosenberg, “Implications of Different Bases for a VAT,” Tax Policy Institute, 02/12

“The federal budget outlook is unsustainable over the long run.  The latest (June 2011) projections by the Congressional Budget Office (CBO)1 show the ratio of publicly-held debt held to GDP, which was 40 percent at the end of 2008, rising from 69 percent in 2011 to 187 percent in 2035 under their Alternative Fiscal Scenario, which assumes that current federal spending and revenue policies will largely continue.  Even under CBO’s Extended-Baseline Scenario, which assumes that all of the 2001-2003 tax cuts expire at the end of 2012, the AMT will no longer be patched, and that Medicare and other health-related spending will be held to modest growth rates, debt held by the public is projected to rise to 84 percent of GDP by 2035.  Rising debt levels increase the chance of a fiscal crisis, a sudden spike in the interest rate the federal government must pay on its debt that would necessitate large adjustments to spending, revenues, or both.  More gradual adjustments could be better designed and less damaging to long-run growth and social welfare.

Two prestigious groups, the President’s National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force, both recommended a sweeping set of changes in taxes and spending policies to address future deficits and eventually reduce the ratio of publicly held debt to GDP below its current level.2  The Debt Reduction Task Force recommendations included adopting a “debt reduction sales tax” structured as a value-added tax (VAT).  A VAT is a broad-based tax on household consumption that is collected incrementally by businesses at each stage of their production and distribution of goods and services.  VATs are an important source of revenue for nearly all countries, and among major countries, the United States is alone in not imposing a VAT.

VATs around the world typically exclude certain consumption items from the VAT base for policy or administrative reasons.  This paper describes the policy and administrative reasons for exclusions from the VAT base and the design of a rebate as a substitute for base exclusions to address distributional objectives.  The paper then analyzes the effect of possible exclusions from a U.S. VAT base or a rebate on the VAT rate necessary to achieve a specific deficit reduction target and on the distribution of the tax burden.   Two options for the base of a VAT are analyzed: a broad base, which would allow the lowest rate necessary to meet the specific target for deficit reduction, and a narrower base that is designed to address the distributional effects of a VAT by omitting items that are disproportionately consumed by lower-income households.  A higher rate would be required on this narrower base to meet the deficit reduction target.  A third VAT option that takes a different approach to addressing the distributional effects of a VAT also is analyzed.  This option uses the broad base of the first option but provides a rebate to households, so it would also require a higher rate than the first option to meet the deficit reduction target.”

 http://www.urban.org/uploadedpdf/412501-Implications-of-Different-Bases-for-a-VAT.pdf

Selling a Tax Increase, What Would Reagan Do?

President Obama could end the Congressional budget stalemate by going to the people directly, as President Reagan did in his first term.  At that time, President Reagan needed to break a deadlock on his tax reform proposal.  The solution was to go on prime-time TV and appeal to the public to send postcards in support to their Congressional representatives.  Granted, a tax cut is an easy sell, and a tax increase a hard one, but the idea is to provide needed cover to Republicans (and some Democrats) to compromise on raising taxes.

Technology favors this approach today, as much easier emails would replace postcards, and the volume of response would surely be higher than Reagan’s successful appeal.  A website would be created to offer direct links to the email addresses of Congress by zip code with pre-formatted messages, e.g., “I support the return to Clinton-level taxes on January 1, 2013. I am willing to pay my fair share to reduce our deficit and debt.”  A web blast could complement a TV appeal.

Polls also favor this approach.  A review of 2011 polls on taxes compiled by Bruce Bartlett reveals that Americans will support President Obama’s call for increased taxes:

(Bruce Bartlett’s blog: CapitalGainsandGames.com)

“Americans Support Higher Taxes. Really.,” June 29, 2011

Contrary to Republican dogma, polls show that the American people strongly support higher taxes to reduce the deficit and improve income inequality. Following are 19 different polls since the first of the year that say so.

A June 9 Washington Post/ABC News poll found that 61 percent of people believe higher taxes will be necessary to reduce the deficit.

A June 7 Pew poll found strong support for tax increases to reduce the deficit; 67 percent of people favor raising the wage cap for Social Security taxes, 66 percent raising income tax rates on those making more than $250,000, and 62 percent favor limiting tax deductions for large corporations. A plurality of people would also limit the mortgage interest deduction.

A May 26 Lake Research poll of Colorado voters found that they support higher taxes on the rich to shore-up Social Security’s finances by a 44 percent to 25 percent margin.

A May 13 Bloomberg poll found that only one third of people believe it is possible to substantially reduce the budget deficit without higher taxes; two thirds do not.

A May 12 Ipsos/Reuters poll found that three-fifths of people would support higher taxes to reduce the deficit.

A May 4 Quinnipiac poll found that people favor raising taxes on those making more than $250,000 to reduce the deficit by a 69 percent to 28 percent margin.

An April 29 Gallup poll found that only 20 percent of people believe the budget deficit should be reduced only by cutting spending; 76 percent say that higher taxes must play a role.

An April 25 USC/Los Angeles Times poll of Californians found that by about a 2-to-1 margin voters favor raising taxes to deal with the state’s budget problems over cutting spending alone.

An April 22 New York Times/CBS News poll found that 72 percent of people favor raising taxes on the rich to reduce the deficit. It also found that 66 percent of people believe tax increases will be necessary to reduce the deficit versus 19 percent who believe spending cuts alone are sufficient.

An April 20 Washington Post/ABC News poll found that by a 2-to-1 margin people favor a combination of higher taxes and spending cuts over spending cuts alone to reduce the deficit. It also found that 72 percent of people favor raising taxes on the rich to reduce the deficit and it is far and away the most popular deficit reduction measure.

An April 20 Public Religion Research Institute poll found that by a 2-to-1 margin, people believe that the wealthy should pay more taxes than the poor or middle class. Also, 62 percent of people believe that growing inequality of wealth is a serious problem.

An April 18 McClatchy-Marist poll found that voters support higher taxes on the rich to reduce the deficit by a 2-to-1 margin, including 45 percent of self-identified Tea Party members.

An April 18 Gallup poll found that 67 percent of people do not believe that corporations pay their fair share of taxes, and 59 percent believe that the rich do not pay their fair share.

On April 1, Tulchin Research released a poll showing that voters in California overwhelmingly support higher taxes on the rich to deal with the state’s budgetary problems.

A March 15 ABC News/Washington Post poll found that only 31 percent of voters support the Republican policy of only cutting spending to reduce the deficit; 64 percent believe higher taxes will also be necessary.

A March 2 NBC News/Wall Street Journal poll found that 81 percent of people would support a surtax on millionaires to help reduce the budget deficit, and 68 percent would support eliminating the Bush tax cuts for those earning more than $250,000.

A February 15 CBS News poll found that only 49 percent of people believe that reducing the deficit will require cuts in programs that benefit them; 41 percent do not. Also, only 37 percent of people believe that reducing the deficit will require higher taxes on them; 59 percent do not.

A January 20 CBS News/New York Times poll found that close to two-thirds of people would rather raise taxes than cut benefits for Social Security or Medicare in order to stabilize their finances. The poll also found that if taxes must be raised, 33 percent would favor a national sales tax, 32 percent would support restricting the mortgage interest deduction, 12 percent would raise the gasoline taxes, and 10 percent would tax health care benefits.

On January 3, a 60 Minutes/Vanity Fair poll found that 61 percent of people would rather raise taxes on the rich to balance the budget than cut defense, Social Security or Medicare.

The economic risk of failure to reach a compromise agreement within two to three weeks warrants the political risk of appealing to the public to provide the cover for opponents to tax increases.  The overwhelming odds are it would succeed.


VAT Gaining Momentum?, 12/21/10

CNNMoney.com surveyed 23 economists about where the economy is headed and how tax reform might be used to stimulate growth and to address America’s debt crisis. Nearly half the economists surveyed believe “overhauling the current system would be the best tax policy going forward,” including lower tax rates combined with ending certain tax preferences. “Several of the economists favor implementing both tax reform and a VAT. ‘Actually, we need a combination,’ wrote David Wyss, chief economist with Standard & Poor’s. ‘The fiscal outlook is disastrous, and unless draconian cuts in Medicare and Social Security are made, taxes will have to rise.'”

On “60 Minutes,” Federal Reserve Chairman Ben Bernanke remarked that “The tax code is very inefficient. Both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.”

The Domenici-Rivlin plan from the Bipartisan Policy Center calls for a VAT offset in the first year by a payroll tax cut. Gov. Mitch Daniels of Indiana has suggested sweeping overhaul with a VAT paired with a flat tax on income with a high deductible. And, President Obama has indicated he would like to see the tax system reformed before the end of the two-year extension of the tax cuts.

Isidore, Chris, “America’s Debt Crisis; Economists: Reform the tax code,” CNNMoney.com, 12/20/10

“Nearly half of economists surveyed by CNNMoney.com think overhauling the current system would be the best tax policy going forward. Reform would mean lower tax rates but an end to many of the deductions and special treatment enjoyed by certain taxpayers.

‘Significantly lower … tax rates in exchange for reducing tax [deductions and breaks] makes the most sense in terms of increasing growth,’ said David Berson, chief economist of the PMI Group.

Nearly a quarter of the economists would pick an even more radical change to the tax system — imposing a so-called value added tax, or VAT, a form of national sales tax common in many other advanced economies.

The tax debate that has dominated in Congress for the last few months — whether to extend the Bush-era tax cuts, or let rates rise to pre-2000 levels on some or all taxpayers — had relatively little support among the economists, with only a handful picking those choices as the most effective long-term tax strategy.

Several of the economists favor implementing both tax reform and a VAT.

‘Actually, we need a combination,’ wrote David Wyss, chief economist with Standard & Poor’s. ‘The fiscal outlook is disastrous, and unless draconian cuts in Medicare and Social Security are made, taxes will have to rise.’

The idea of reforming the tax code has been gaining greater support in Washington, with both President Obama and Federal Reserve Chairman Ben Bernanke voicing support for tax reform, and several blue ribbon groups looking at the issue of deficit reduction say tax reform should be part of the solution.”

http://money.cnn.com/2010/12/22/news/economy/economist_survey_tax_reform/index.htm