Do We Need a VAT to Solve Our Long-Run Budget Problems?

Abstract

The U. S. federal budget is on an unsustainable path. Three programs – Social Security, Medicare, and Medicaid constitute about one-half of spending and are growing faster than tax revenues and the economy. It is hard to imagine any solution to the problem that does not require some combination of tax increases and spending restraint. If taxes are to be increased, there are three options: rates can be increased in the current system; there can be a fundamental, revenue raising tax reform; or a brand new tax, such as a Vat may be imposed. The first option would be extremely inefficient and inequitable and the second would be very difficult politically. That leaves the possibility of a Vat which would be especially likely if reform has to take place in the midst of a budget crisis.

Keywords: VAT