VAT Watch, ctd

The Brookings Institution agrees with Paul Volcker and likes the idea of a VAT too.

First, if it were proposed this year or next but phased in slowly as the unemployment rate dropped, it would encourage more consumption as households rushed to buy everything from ipads to new cars while these goods were still “VAT-free.” Without higher spending by consumers, we face the possibility that the economic recovery will falter. Second, over the longer-run a VAT would encourage saving – just what the country needs if we want to remain competitive by investing in new technologies and new products. Third, a VAT is relatively easy to administer and more economically efficient than an income tax. It’s true that a VAT is regressive but this problem can be addressed by making other, more progressive, changes to taxes or spending. One option would be to reduce payroll taxes and another would be to provide refundable credits to low-income households. Ways would also need to be found to make a VAT consistent with state and local sales taxes, perhaps by allowing states to piggyback on the federal VAT or by returning some of the revenue to lower levels of government. 

Astute readers may notice that the claim that “a VAT is relatively easy to administer” seems to contradict my previous post’s linked claim that “the U.S. will struggle for at least two years and probably longer to implement a VAT” because of its start-up complexity. Well either a lot is contained in that qualifier “relatively easy” or maybe Isabel Sawhill of Brookings looks at a 2+ year implementation as a sliver lining to “encourage more consumption” in the short term. So can the problem be a feature? It appears to me that switching to a VAT wouldn’t be easy but once in place it doesn’t seem to have many administrative drawbacks. Reminds me of a large capital investment in few ways.

(h/t: Clive Crook)

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