How a VAT could tax the rich and pay for universal basic income

Updated on June 2, 2022

As far as the eye can see, the Congressional Budget Office has predicted a string of $1 trillion deficits. The deficit must be reduced by both spending cuts and economic development, as well as the introduction of additional levies. When combined with a universal basic income (UBI), I’ve proposed in my new Hamilton Project paper, a 10% Value-Added Tax (VAT) and the creation of a “cash payout” for every American household.

Significant net money would be raised, and the idea is as progressive as any new tax and as helpful to economic growth as any other currently being considered. A wealth tax or capital gains reforms, for example, would be replaced by the VAT, not the other way around.

At each stage of manufacturing, the VAT is a national consumption tax, similar to a retail sales tax, but collected at a lower rate. Many dollars are raised without affecting economic decisions like saving and investing or the structure of enterprises in any way. The administration of this tax is also simpler than that of a retail sales tax.

An American VAT

An American VAT should be structured like the most successful VATs in other countries. It should be based on a large number of people buying it. It should only apply to goods and services purchased in the United States, regardless of where they were created. Businesses with less than ten employees should be excluded from paying VAT, but should have the option to do so if they so desire. After-VAT prices should be taken into account for calculating Social Security and other means-tested government programmes, such as Temporary Assistance for Needy Families.

A common feature of VAT across the globe is the shifting of borders. Small enterprises are often free from VAT in most countries (somehow defined). 43 million small enterprises would be free from the VAT if it were capped at $200,000 in gross receipts.

Finally, the UBI payment would relieve low- and moderate-income households of the VAT burden while also providing additional resources. My proposal would establish the UBI at the federal poverty threshold multiplied by the VAT rate (10 percent). As an example, a family of four would get around $5,200 per year in Social Security benefits. Andrew Yang’s idea for a universal basic income (UBI) is comparable to, but smaller than, my own.

Effects

Even after deducting the UBI, a ten percent VAT would generate $2.9 trillion over ten years, or 1.1 percent of GDP.

The economic impact of this tax will be determined by how the government intends to use the collected funds. However, if everything else is equal, it would be better for the economy (i.e. less distortionary) than raising income tax rates.

It is recommended that the VAT proceeds be utilised to stimulate the economy in the early years in order to avoid short-term economic disruptions, and that the Federal Reserve should accommodate the VAT by allowing consumer prices to grow.

According to the Tax Policy Center, a VAT combined with a UBI would have a profoundly progressive effect. The lowest-income 20 percent of households would see a 17 percent boost in after-tax income as a result of this. For middle-income families, the tax burden would remain the same, but for the wealthiest households, the incomes of the top 1% would decline by 5.5%.

As a result, the VAT acts as a 10% tax on current wealth because future spending can only be paid by existing wealth or future wages. The VAT’s implicit wealth tax is much more difficult to dodge or evade than a tax on accumulated assets because it doesn’t necessitate asset valuation.

States may also benefit from a VAT. The new federal law does not compel states to change their consumption taxes, but doing so might improve the structure of those levies, which currently exclude many services and goods while taxing companies. The provinces of Canada serve as a case study for how VATs at the national and subnational levels can “harmonise. ”

Politics

A VAT is in place in 168 nations. Could a bill like this get through Congress? It may not be so far-fetched after all. Former Texas senator Ted Cruz and Kentucky senator Rand Paul as well as former House Speaker Paul Ryan have all suggested similar taxes in recent years under different names.

As Larry Summers has said, a VAT is unpopular because liberals see it as regressive, while the conservatives see it as a money-making opportunity. He was absolutely correct in his assessment.

In conjunction with a universal basic income (UBI), a progressive VAT can be a useful tool for liberals. Health care or child care would be a more progressive use of the funds.

Conservatives can also get the benefits. It’s a common misconception that higher VATs lead to more government spending. If there is a long-term budget deal in the US, a VAT could be implemented as part of it.

This discussion will ultimately revolve around where the money collected by taxation is spent. A VAT with a UBI could be one of the better policy options if new revenues are inevitable in any effort to control the federal budget.

Grace Enda and Claire Haldeman have been instrumental in my research efforts.