The United States currently has a 27 trillion-dollar deficit and growing. The COVID-19 epidemic alone will result in several trillion dollars of additional debt. The total debt is increasing at such an alarming rate, that on a debt to GDP basis, we are in banana republic territory. In fact, most banana republics look better financially than we do. According to the IMF, the United States debt to GDP ratio is 103%, worse than Brazil, Jamaica, Uruguay, Aruba, Argentina, and plus dozens of others.
So, how are we going to pay for this? Now is the time to institute a Value Added Tax (VAT).
A Value Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. It is the world’s most common form of consumption tax, imposed by over 150 countries, including every developed country in the world. Well, all developed countries except one: The United States.
The impact of the rising debt has not yet been felt because interest rates are historically low, but that will not be the case forever. The debt will have to be repaid eventually, so the United States needs to do something about this before it becomes an unsolvable crisis.
Fortunately, President Biden has recognized the problem and his administration is proposing a dozen new tax initiatives to help balance the budget. Despite the Democratic majority in both chambers of Congress, some tax proposals will be harder to enact than others. None of these new tax initiatives include a Value Added Tax.
A common misconception about a VAT is that it is not an add-on, like a State sales tax. It causes prices to go up, but you don’t see the tax at the cash register. Since the tax causes prices to rise, liberals are correct that it is regressive because it hurts low-income earners who spend most of their income on necessities. The conservatives are also correct in saying that the VAT tax is a money machine because every time it is raised, it produces a huge amount of revenue.
Nevertheless, we need the VAT now and I hope the Biden administration will make it a priority to study it. According to the Congressional Budget Office (CBO), a VAT of 5% would raise roughly $300 billion a year, an amount we will need to start closing the budget gap. The regressive nature of the tax can be easily solved through tax credits and deductions to low-income families. As with other countries, the tax would be waived for exports, so as not to hurt American competitiveness. Republicans and Democrats should be able to agree on a VAT more readily than on tax increases for high earning individuals. It would be even harder to get a corporate tax increase through Congress since ours is already among the highest in the world.
The Biden tax plan includes more than a dozen items. Although highly unlikely all would pass Congress, tax revenues would rise by $300-$400 billion a year. The three most controversial taxes – raising the taxes on high incomes, raising taxes on capital gains, and raising the corporate tax – would raise approximately $200 billion a year.
It’s anyone’s guess as to what a final tax package will look like after haggling in committee, but in the end, would the final package raise as much revenue as a 5% VAT, i.e., $300 billion? I doubt it.
The VAT has a number of advocates and proposals. Former presidential candidate Andrew Yang proposed a VAT combined with a Universal Income proposal. Both may be good ideas, but trying to get them passed as a package is demanding way too much from our partisan legislators. On the other hand, a well-designed VAT proposal in a Democratically controlled Congress may well have a good chance of passage.
President Biden, more than any other president in modern times, knows from his decades in the Senate how to negotiate and compromise. The fact that he has always been very popular among his colleagues in both chambers is the icing on the cake.