VAT
Suddenly a lot of people are interested in value added tax. I don't mean George Will who wants to replace the income tax with a value added tax. I mean the people who want to add a value added tax to the current tax system and the ones who disagree. They are diverse even if you only count the ones who are old enough to drink inlcuding Ezra Klein, Bruce Bartlett,
Matthew Yglesias and, sort of, Brad DeLong arguing pro and Kevin Drum and Atrios arguing con.

I can't help joining in. Well I think a reasonable ranking is income taxes good, VAT not so good, payroll taxes bad,Thatcher-Magaziner same tax for all aweful.

So my proposal would be to replace FICA with VAT. This would be a way of prefunding social security and medicare for the boomers (the second of these two is actually needed) funding universal health insurance, eliminating the deficit and all sorts of wonderful things. The incentinve effects of VAT are less bad than those of a payroll tax. Also VAT is, at least, not regressive.

The incentive effects differ in two ways. First payroll taxes reward the substitution of capital for labor. This is not a good policy for a country which has had very poor employment growth for 4 years now and which refuses to save enough to finance its investment. Second, VAT is a tax both on real value added and on the Value added deflator which increases in the price a firm charges. Thus, relative to payroll taxes, VAT punishes firms for raising prices. This means it causes imperfectly competative firms to act more like competative firms with efficiency benefits.


A problem with VAT is that setting up a system is very costly (as noted by Atrios). Every waiter in Italy knows the difference between a ricevuta and a fattura. the value of a fattura can be subtracted from value added so if you are on an expence account you have to ask for a fattura. I personally have never had the experience. Basically this means that it is not worth introducing a small VAT.

Also a really high VAT would be evaded.

The progressivity of the tax code can be maintained with the income tax code especially the earned income tax credit. Oh and VAT is a way of cheating on GATT (not WTO). VAT is charged on imports and forgiven on exports. The fact that the USA has 0 VAT and (depending on the state) low to zero sales tax is roughly as if everyone else had tariffs 10 to 20% higher than ours. This dwarfs open tariffs.

The only fatal problem is that any policy reform will be hijacked and turned into something aweful by the Republicans. So for the time being, decent people have to just say no.

Update: Max Sawicky is not enthusiastic about a VAT mainly because of the administrative costs. They are heavy and are especially huge while people suddenly obliged to pay VAT are trying to figure out what it is. I low VAT would imply huge costs per dollar of revenue.

PGL at angry bear is not enthusiastic at all.