US debt pit: Income-tax hikes won't fill it. Neither will spending cuts. So...

The US debt could double to over $20 trillion over the next decade if policymakers don't act. Is it time for a VAT?

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    Neither income tax hikes or budget-cutting alone fill the debt pit that the US has got itself into. So where can the Uncle Sam find revenue?
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This was my day: I went to the dentist. I spent an hour being interviewed on end-of-life issues. And I listened to four tax experts commiserate about the massive fiscal hole we have dug for ourselves and how we can shovel our way out. I’ve had better.

Yet, the Tax Policy Center panel, called Desperately Seeking Revenue, generated more than the usual budget gloom and doom. True, TPC co-director Rosanne Altshuler presented some truly hair-raising projections of the depth of the problem: In sum, she made two points: 1) Unless we act, we will add $11 trillion over the next decade to the national debt, roughly doubling what we already owe. 2) It is not possible, in any reasonable world, to close that gap by hiking income tax rates alone. Thus, the title of both her paper on the subject (written with colleagues Bob Williams and Katherine Lim) and the panel: Desperately Seeking Revenue.

Today’s panelists agreed on the nature of the problem, but not on the solution. Rosanne thinks a Value Added Tax will inevitably become a key element in any revenue-raising exercise. Victoria Perry, the tax policy division chief at the International Monetary Fund, noted that every other developed nation in the world already has a VAT, and they’ve got plenty of experience they can share on how to manage one.

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But not everyone thinks a VAT is the way to go. Ted Gayer, the co-director of economic studies at The Brookings Institution, would fill the hole in part with a carbon tax--a levy that would have the twin benefits of both reducing greenhouse gas emissions and raising somewhere between $60 and $80 billion in new revenues annually over the next decade. That wouldn’t be nearly enough to fix the fiscal problem, so Ted would also auction the broadcast spectrum (worth another $100 billion or so a year), and cut tax subsides for employer-sponsored health insurance and mortgage interest. And while spending was not a topic today, Ted could not pass up the opportunity to suggest cutting promised Medicare and Social Security benefits. Ted makes friends everywhere he goes.

That’s why I’m not sure his revenue changes would be politically more acceptable than a VAT. Ted's proposed tax hikes would surely help with the budget math, however.

Jim Nunns, chief of the New Mexico tax policy division and long-time tax analyst at the U.S. Treasury, sees some short-term opportunities to raise revenues through the income tax base, although he too would eventually turn to a VAT. Jim and Victoria agreed that one common concern about the VAT—that it would create severe problems for states that rely on a sales tax—may be overblown. Victoria said that Canadian provinces are living quite well with a federal VAT. And Jim felt states in the U.S. could also manage.

In fact, he added, a national VAT could actually help states in at least one respect. Today, sales taxes are complex and inefficient in part because they are shot full of exemptions. What is tax-exempt food? What is taxable candy? How do states tax goods and services sold over the Internet? With a VAT, Washington would set that tax base, potentially allowing states to dodge the special interest politics that creates these distinctions.

We are just beginning this discussion. But pay attention, because one thing is certain: There is no way we will come close to balancing the budget by just cutting spending. New taxes must be part of the equation. And that presents a golden opportunity to fix an Internal Revenue Code that desperately needs repair.

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