January 30, 2020

TAX WHAT YOU DON'T WANT:

How a VAT could tax the rich and pay for universal basic income (William G. Gale, 1/30/20, Brookings)

A 10 percent VAT would raise about $2.9 trillion over 10 years, or 1.1 percent of Gross Domestic Product, even after covering the cost of the UBI.

As with any tax, its effects on the economy would depend on how government uses the revenue. But all else equal, it would be better for the economy (that is, less distortionary) than hiking income tax rates.

To avoid disrupting the economy in the short run, the VAT proceeds should be used in the early years to stimulate the economy, and the Fed should accommodate the VAT by letting the consumer price level rise.

The Tax Policy Center estimates that the VAT in conjunction with a UBI would be extremely progressive. It would increase after-tax income of the lowest-income 20 percent of households by 17 percent. The tax burden for middle-income people would be unchanged while incomes of the top 1 percent of households would fall by 5.5 percent.

It may seem counter-intuitive, but the VAT functions as a 10 percent tax on existing wealth because future consumption can be financed only with existing wealth or future wages. Unlike a tax imposed on accumulated assets, the VAT's implicit wealth tax is very difficult to avoid or evade and does not require the valuation of assets.

A VAT also could benefit states. While states would not have to conform to the new federal law, doing so could improve the structure of their consumption taxes, which tend to exempt services and necessities and often tax businesses.  Canada's provinces provide an example of how national and sub-national VATs can "harmonize."

One of the most important functions of consumption taxes--particularly when coupled with wealth transfers--is to massively incentivize savings/investment.

Posted by at January 30, 2020 11:38 AM

  

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