David Kirkpatrick

October 23, 2009

Bruce Bartlett comes out in favor of VAT

Filed under: Business, Politics — Tags: , , , , , — David Kirkpatrick @ 4:13 pm

Bartlett is an interesting read these days. One of the major supply-siders back in the day, his economic positions seem to have shifted a  bit. He says, and I tend to agree with him, he’s only reacting to the conditions on the ground and his fundamental economic beliefs are no different than when Reagan held the White House. Of course a value added tax was one tax vehicle in the supply-side economic toolbox.

In a move that probably makes the heads of his old pals in the GOP explode, Bartlett writes in Forbes an extended defense of, and recommendation for, a national value added tax.

From the middle link:

few years ago, I concluded that the magnitude of our looming fiscal problem was so enormous that higher taxes were inevitable–and that was long before the recent crisis made matters vastly worse. Moreover, I concluded that the magnitude of this tax increase is so great that it would seriously cripple the economy if accomplished through higher rates on an already dysfunctional income tax system. Reluctantly, I concluded that a value-added tax (VAT) is the best way to raise the revenue that would, in any case, be raised.

When I first made this suggestion in a Los Angeles Timesarticle in 2004, I was building on a large body of tax analysis showing that the VAT is the best known way of raising revenue. When I say “best” I mean that it raises large revenues from low rates and has minimal disincentive effects. In economists’ speak, it has a very small dead weight or welfare cost–the economic output lost by the tax over and above the revenue collected.

Based on the experience in other countries, I estimate that a U.S. VAT could realistically tax about a third of the gross domestic product (GDP), which would raise close to $50 billion per percentage point. If we adopted Europe’s average VAT rate of 20%, we could raise $1 trillion per year in 2009 dollars.

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