http://www.brookings.edu/opini...407_VAT_sawhill.aspx
Consider a Value-Added Tax
Taxes, Tax Reform
The Brookings Institution
April 07, 2010 —
The voices in favor of a value-added tax (VAT) as a new revenue source for the U.S. are getting louder. The latest person to weigh in on the topic is Paul Volcker who, according to Reuters, floated the idea at an event in New York on Tuesday, saying “if at the end of the day we need to raise taxes, we should raise taxes.”
Volker is so right. We badly need more revenue. Last year federal government spending was 26 percent of GDP and revenues were 15 percent of GDP for a staggering gap of 11 percent. Some of this gap is the result of the recession but even in a fully recovered economy, the gap will still be in the neighborhood of 6 percent. We are risking another financial crisis if we don’t address this enormous hole in our public finances.
Some but not all of the gap should be filled by cutting spending. New or higher taxes have to be part of the bargain, and a VAT is gaining traction as one way to get the needed revenues. If the proceeds of a VAT were earmarked for federal health care spending this would link health expenditures to taxes in a very visible way and put a natural brake on such spending. If the public insists on having more and more expensive health care paid for by the government, they would have to agree to a higher VAT rate.
Told you so.
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