Many countries, including members of the Organization for Economic Cooperation and Development, raise revenue with a consumption tax levied on incremental increases in the value of goods and services as they move through the supply chain. These value-added taxes -- VAT for short -- generate considerable income and are relatively efficient to administer.
The Congressional Budget Office recently issued a report highlighting this policy option to possibly help reduce the U.S. budget deficit. An introduction of a 5 percent VAT, with a broad base which would cover about two-thirds of household consumption, would increase federal revenues by almost $3 trillion from 2020 through 2028, according to the CBO.
That would be a welcome boost in revenue as the CBO, in separate data issued Jan. 28, forecast the budget deficit will top $1 trillion in fiscal 2022. The last time the U.S. ran a deficit exceeding $1 trillion was during the financial crisis bailout.
While a $3 trillion boost to revenue is a large sum, it’s less than 10 percent of the estimated cost of the “Medicare for all” proposal over a ten year period, according to a recent study by Charles Blahous, a senior research strategist at the Mercatus Center at George Mason University in Virginia and a former public trustee for Social Security and Medicare.
The 5 percent hypothetical level of taxation is lower than the 2017 average national VAT rate of 19.2 percent for OECD countries.
As with all taxes, there are distributional concerns.
Consumption taxes are thought to be regressive since lower-income families generally consume a greater share of their income than higher-income families do. One way to address the regressive concerns would be to exclude certain basic goods and services from the tax base.
The CBO estimates that if a VAT was applied in a more limited format, to a smaller tax base of 42 percent of household consumption, the tax would generate slightly more than $1.9 trillion through 2028.
Another way to alleviate this type of tax burden would be to offer refundable income tax credits for low-income individuals and families.
To contact the reporter on this story: Alex Tanzi in Washington at atanzi@bloomberg.net
To contact the editors responsible for this story: Kristy Scheuble at kmckeaney@bloomberg.net, Vincent Del Giudice
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