William G. Gale
Brookings Institution
To raise revenue in a progressive, efficient, and administrable manner, this chapter proposes a new national consumption tax: a broad-based credit-invoice value-added tax (VAT). The proposal comes with several qualifications: the VAT should complement, not substitute for, new direct taxes on the wealth or income of affluent households; to ensure the policy change is progressive, the VAT should be coupled with adjustments to government means-tested programs to account for price level changes, and with a universal basic income (UBI) program; to avoid having the VAT depress the economy, revenues should be used to raise aggregate demand in the short run and the Federal Reserve should accommodate the tax by allowing prices to rise. A 10 percent federal VAT that funded a UBI equal to 20 percent of the federal poverty line would be highly progressive (with net income rising among the bottom forty percent and not changing in the middle quintile) and would still raise more than 1 percent of GDP in net revenue. VATs are a proven success, existing in 168 countries. VATs have been proposed by both Democrats and Republicans in recent years. Concerns about small businesses, vulnerable populations, and the states can be easily addressed.
Source: ssrn.com
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