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.”

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:

“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.

GE Supports Tax Reform!

GE’s CEO, Jeffrey Immelt, and GE spokesperson Andrew Williams have recently commented that they would support tax reform that makes the U.S. more competitive and which would also assure that “everyone pays their fair share.”  See:“GE tax issue still rages on,” Rob Varnon, April 25, 2011,

“’GE supports enactment of a tax system that is consistent with global norms and allows American companies to compete on a level playing field with their foreign competitors,’ Andrew Williams, a spokesman for GE, said Monday . ‘We support tax policies that are consistent with policies encouraging U.S. exports. Our global competitors have tax systems with each of these core principles. The United States cannot afford to be an outlier, as it is now.’

GE Chairman and Chief Executive Officer Jeffrey Immelt said in a speech in March the U.S. tax system is ‘old, complex and uncompetitive. The purpose of a tax code should be that everyone pays their fair share, including GE. But it should also promote jobs and competitiveness and does the opposite.’  He said the nation must close loopholes and lower corporate tax rates to put it ‘in line with every other developed country in the world.'”

While stopping short of mentioning a value added tax, these comments from GE make all the basic arguments for a VAT: encourage exports, level the playing field by taxing imports, harmonize taxes for global competitiveness, eliminate a competitive disadvantage to the U.S., end complexity, assure that “everyone pays their fair share, including GE,” promote jobs, eliminate loopholes, and lower corporate tax rates.

The VAT we have often noted is a political hot potato, and Treasury Secretary Geithner recently affirmed there is “no enthusiasm” for a VAT.  Perhaps Jeffrey Immelt, if he is willing to directly endorse a VAT, could convince the President that this is the measure we should take, i.e., as Laura Tyson has recommended, cut the corporate rate and simultaneously implement a value added tax.

Tyson, Laura D’Andrea, “The Logic of Cutting Corporate Taxes,” Economix blog, The New York Times, 04/08/11

Professor Graetz, and more recently, William G. Gale and Mr. Harris have proposed introducing a value-added tax to reduce the deficit and to finance a reduction in the corporate tax rate.

Most countries that have reduced their corporate tax rates have a value added tax that accounts for a significant share of their tax revenues. To offset the regressive effects of a value added tax, countries have used lower value-added-tax rates on items like food, health care and education, as well as cash subsidies for poor households.

I believe that a federal value added tax with such offsets should be considered as part of a balanced multiyear deficit-reduction package that includes a sizeable reduction in the corporate tax rate.


Lindsey, Lawrence B., Testimony before the Senate Budget Committee, 02/02/11

“(O)ur income based system…encourages economic activity to go abroad.  An item that is manufactured in China but purchased in America has a cost structure that involves no U.S. income or payroll taxes on its labor content and virtually no U.S. corporate tax on the capital involved in the production.

Of course China does have an income tax, but it is quite low compared to ours.  The Chinese Individual Income tax produces revenue equal to just 1.2 percent of GDP compared to roughly 7 percent in the United States.  The largest component of the  Chinese tax system is the Value Added Tax, which generates roughly one third of all Chinese tax revenue.  But Value Added taxes are rebated on exports, so this tax does not apply.  Conversely, an item built in America and then sold to China involves labor costs that pay both income and payroll  taxes and capital costs  that involve the whole panoply of U.S. taxation. When they arrive in China the import cost is subject to Chinese Value Added Tax.  And this is not just the Chinese.

Throughout Europe Value Added Taxation has increasingly replaced direct taxation on personal and corporate incomes over the last couple decades and under World Trade Organization rules it is perfectly legal for them to rebate the tax on exports and impose it on imports.

We complain a lot about the advantages the Chinese give themselves through manipulation of their exchange rate.  At the same time we induce this massive self-inflicted wound on ourselves in the form of our income based tax system.  And whenever someone advocates raising rates within our current tax regime they are implicitly calling for these distortions to be larger and therefore for Chinese goods to become even more competitive here and our goods to become even less competitive overseas.”

New York Times, “The Tax-Cut Deal,” , 12/18/10

Deficits are not as pressing a problem as economic recovery. A stronger recovery must not only come first, but is the best way to begin to heal the budget. Fighting to uphold health care reform is also crucial, because, in the long run, that is key to taming the deficit.

Further, near-term stimulus must be paired with a credible plan to reduce deficits as the economy recovers — including tax reform that raises revenue through various changes, like a simplified income tax, a new value added tax and a financial transactions tax. Even though he agreed to extend the Bush tax cuts through 2012, Mr. Obama must educate the public on their ruinous effects: They account for roughly 40 percent of today’s deficit, a share that will grow over time.

When deficit reduction begins in earnest, tax increases and cuts in big-ticket programs — Medicare, Medicaid, Social Security and defense — will be the focus. Before that, Mr. Obama must not be drawn into nickel-and-dime cuts that will not solve the deficit problem — and will impede recovery.