Tax Analysts Blog

Before Going to a VAT, Consider Fixing the Income Tax

Posted on Apr 13, 2009

The government's finances are in terrible shape -- far, far worse than anything we experienced in the 1980s. Budget experts are nearly unanimous that the government must undergo major tax increases or major cuts in Social Security and Medicare -- the sooner, the better. And because we need so much new revenue, the tax increases must extend beyond the top five percent of taxpayers that President Obama is now targeting. My fellow blogger Joe Thorndike, along with other experts like Len Burman of the Tax Policy Center and Prof. Michael Graetz of Columbia, have suggested a value added tax. But before we take this giant step, the United States should consider the similarly earth-shaking alternative of fundamental income tax reform.

Despite what the textbooks tell us, a VAT is no picnic -- just ask the Europeans. Why should we add another funky tax system on to the one we already have? We could raise hundreds of billions annually -- and greatly simplify taxation -- by eliminating deductions and credits in the current tax system, Yes, this means your favorite tax break whether it be for mortgage interest, health insurance, solar energy, industrial research, or low-income housing. Of course, eliminating these tax benefits is considered politically impossible -- but consider the alternatives. Something politcally impossible must happen if the line in the chart shown above has any chance of returning to earth.

Over the last two decades the list of "tax expenditures" -- government programs and subsidies run through the tax code -- has grown enormously. This has occurred because Democrats discovered this was the only way to move their agenda forward in a time when more government spending was off limits. Republicans went along because they viewed tax expenditires as tax cuts.

Here's the key to the future of U.S. tax reform: get Democrats to view elimination of tax expenditures as a tax increase and get Republicans to view it as an attack on big government.

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