Why a value-added tax makes sense

A value-added tax will allow the country to more efficiently pay our bills, allowing us to avoid painful cuts.

By , Guest blogger

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    A Turbo Tax software software filing package is seen on display in Manhasset, New York, April 15. Adding a value-added tax could be the best way to reform our tax policy, say some economists.
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I don’t mean putting a falsely-positive “spin” on the idea of a value-added tax–but rather: could the VAT be to tax policy what “spinning” has meant to the group fitness industry?

A few weeks ago at a Brookings event featuring Congressman Paul Ryan (R-WI) speaking on his “Roadmap” plan, I made an analogy between effective strategies to reduce the budget deficit and effective ways to lose weight. I argued that the problem with the Ryan plan was that it was like an “all diet but no exercise” approach, which would be unsustainable because it would make us feel deprived of the “sweets” (e.g., special-interest government spending) we want along with the good healthy food (e.g., our critical social insurance programs) we need. (We’d end up binging and purging, is what I was thinking but didn’t get to elaborate on.)

A week after the Ryan event, the New Republic’s Jonathan Chait made the same analogy in talking about supply-side ideology as it has been displayed recently in discussions about extending expiring tax cuts (the routinely expiring variety as well as the “mother” of all tax extenders, the Bush tax cuts):

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Imagine a man who has to lose weight. Either he needs to eat fewer calories or burn more of them. Conservatives are arguing that he should exercise less, because this will force him to eat less food. [The Heritage Foundation's J.D.] Foster writes, “Lower taxes are evidently what the American people want, which is especially galling to the tax-increase crowd.” And it’s true — Americans want to keep their spending and tax cuts too. Diets that promise to let you spend all day on the sofa and still eat lots of delicious food are also popular.

So I think we need to exercise more and exercise more efficiently. We need to change the way we exercise, not just repeat the same old tired step aerobics classes of the past. We need the equivalent of “spinning”

If you read what all the best minds in tax policy are writing, you come to realize that whether they lean left or lean right, they’re all talking about the real value of a tax that could change the way we raise revenue–like “spinning” changed the way we exercised–the value-added tax (VAT).

Here’s what the Brookings Institution’s Bill Gale and Ben Harris have to say about it. They go through the full list of major concerns and criticisms of the VAT and explain how each could be fairly easily addressed. The VAT is not perfect, but it could be the most “relatively attractive choice” available to us, in terms of ways to raise badly-needed revenue. They conclude:

The VAT is not the only tax or spending policy that can constructively help solve the fiscal problem, nor will it solve the problem by itself. Nevertheless, to oppose the VAT is to argue either (a) there is no fiscal gap, (b) ignoring the fiscal gap is better than imposing a VAT, or (c) there are better ways than the VAT to make policy sustainable. No one disputes the existence of a fiscal gap, though, and the economic costs of fiscal unsustainability are enormous. As to the notion that there are better ways to put fiscal policy on a sustainable path, we would be excited to learn about them. In the meantime, policy makers should not let the hypothetical—and to date undiscovered—ideal policy get in the way of the time-tested, more-than-adequate VAT.

And here’s the whole intellectual journey Bruce Bartlett’s been on regarding the VAT–spanning more than 25 years!–and what he concluded in one of his more recent pieces published in Forbes (my favorite line emphasized, speaking of good analogies):

[E]ventually I decided that it was stupid to oppose something because of its virtues. Opposing a VAT because it’s too good is like breaking up with your girlfriend because she is too beautiful.

In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost.

Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.

And coincidentally (and to come full circle), Shawn Tully of Fortune very recently interviewed a drywall-hanging-while-on-August-recess Paul Ryan about the idea of a VAT:

I asked Ryan to handicap the probability of another legislative landmark that would forever change the course of the U.S. economy: The adoption of a European-style value-added tax, or VAT.

Right now the VAT appears so radical that it’s gained little support in Congress and isn’t even endorsed by the Obama administration. But Ryan told me that a VAT is far more likely than most Americans imagine. The reason isn’t the one that many experts are forecasting — that the Fiscal Commission appointed by President Obama will recommend the controversial levy. “I don’t believe the Commission will advocate a VAT,” Ryan told me, adding that he doesn’t speak for his fellow members.

On the contrary, Ryan fears another path to the VAT. “It cannot pass without a fiscal crisis,” he warns. “Our leaders are now courting one with big spending and by adding new entitlements. They know in the back of their minds that if a fiscal crisis comes, they can throw a VAT on top of that.”

Ryan concluded by saying that the economy now faces two layers of uncertainty — the threat of a debt debacle that’s already well known, and the added danger that the solution will be the heretofore unimaginable and largely unforeseen: a VAT. With that, the congressional carpenter signed off: “I’ve got to go back to hanging drywall.”

One way or another, I think some form of a VAT is inevitable, and that’s not a bad thing. It’s probably one of the best forms of “exercise” we could get into right now. It’s not something we would necessarily choose to do for the heck of it, if we didn’t need to “lose weight.” But given that yes, we have to endure some “pain” to get some “gain” (uh, loss in this case), it’s better than the boring treadmill of just raising marginal tax rates, and certainly more effective than the “thighmaster” (while eating in front of the TV) Bush tax cuts.

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