Responding to Gale and Harris on the VAT

William Gale and Benjamin Harris of Brookings have a paper out proposing a 10% VAT for use in deficit reduction. They give the right arguments as to why the VAT is a good idea. I agree that we need a VAT but disagree with Gale and Harris on why.

The VAT should be walled off to fund discretionary spending and should likely be higher than 10% to do so. It should be a replacement for income taxes for lower income families (combined with a business income tax to replace health care and corporate profits taxes and fund health and child tax expenditures).

Income tax increases are necessary to fund the medium term debt explosion, which is caused primarily by the need to make good on the IOUs given to the Baby Boomers and Gen Xers for higher payroll taxes to build a Trust Fund. This trust fund ended up funding general government as an alternative to revoking the Reagan tax cuts in whole or in part and funding raising retirement costs from the general fund in the 1980s. A VAT would impact retirees harder than raising income tax, so it would be unfair to those of us who essentially paid a VAT with profits excluded to hit us with another one.