Regressive Taxation and Money Machines: Reconciling a Us VAT with Progessivity
4 Pages Posted: 28 Dec 2022
Date Written: December 16, 2022
The United States faces an unsustainable fiscal deficit, which is made worse as interest rates rise and as borrowing from China becomes politically difficult. To resolve this problem either spending must be cut, or revenues need to increase; printing money is not an option, as current inflation rates show. But spending cannot be cut significantly because there is too much political opposition to cutting the entitlements. Therefore, the US needs more revenue, and the only realistic option is to enact a VAT, since the income tax burden on the middle class is already high and not enough revenue can be raised by just taxing the rich. In addition, a VAT can be used to address needed investments by for example adopting universal health insurance, investing in education, and combating climate change. The main objection to a VAT is its regressivity, and alleviating regressivity within the VAT is not easy. Politically, opposition to the VAT among Democrats can be addressed by also increasing income taxation on the rich, as was done by other countries (e.g., Australia) when they adopted the VAT.
Keywords: VAT, Accrual taxation, progressively
JEL Classification: H26
Suggested Citation: Suggested Citation