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The reason the VAT is on the table is also stated in the referenced article by Orszag: "Although hardly anyone wants to admit it, we're not going to solve our budget deficit unless revenue is part of the equation." And while in the short term it may be possible to address the deficit by raising income tax rates(Orszag suggests letting all the Bush tax cuts expire in 2013}, in the long term it doesn't seem plausible that we can raise sufficient revenue that way to pay for Medicare, Medicaid, Social Security, interest on the national debt, and defense and some discretionary (but politically popular) spending. In fact, sometime around 2042, spending on the entitlement programs alone is projected to consume all federal revenues, leaving nothing for any other purposes. Nor do I believe it is politically possible to rein in the growth of the entitlement programs sufficiently to dispense with the need for a VAT. The best chance to do that was health care reform, but it was missed because the reform did nothing to address the core incentives of both patients and doctors to order more procedures, since the doctors are still paid by procedure and the patients do not bear anything like the full cost. It seems to me that the question isn't whether the United States will adopt a VAT, but when and under what circumstances. There are two likely scenarios to consider.


Reprinted with the permission of Tax Analysts.