Search the archive.

“This conclusion I came to is that we’re not going to see house prices crash because supply and demand just won’t allow it,” Ramsey said during his Ramsey Real Estate Reality Check last year. “There’s too many buyers chasing too few houses and that’s going to hold the market.”

Although anything is possible, Ramsey still believes that — although the present housing situation is far from ideal — the housing crash of 2008 was a once-in-a-century anomaly, as was the hot pandemic housing market, Moneywise detailed.

A VAT would require the IRS, or a new agency, to establish an administrative apparatus, with its own forms, instructions, regulatory guidance, processing, taxpayer service, and collection and enforcement activities. Although much of this structure might be similar to what currently exists in the IRS, there would still be a new set of procedures and a new administrative structure whether or not the IRS administered the VAT. This would require a significant appropriation in advance of the VAT’s startup to establish the apparatus and pay for initial taxpayer education programs, and annual appropriations thereafter.

The VAT occupies a middle ground between tax increases on the rich and entitlement cuts. Although the VAT is not as economically efficient as entitlement cuts, it is more efficient than high-income tax increases. Although the VAT cannot match the strong progressivity of tax increases on high incomes, it avoids the severe regressivity of entitlement cuts.

That combination makes the VAT an attractive basis for the bipartisan compromise that will be needed to address the fiscal gap. The VAT may not be either party’s first choice, but it could be both parties’ second choice, if they ever find a way to work together.

Ultimately, the challenge in enacting a VAT is political. Representative Al Ullman (D-OR), who was chair of the House Ways and Means Committee in the 1970s, supposedly was defeated after proposing one. But this story is a myth, and good politicians like John Howard of Australia have managed to build a broad legislative coalition to enact a VAT even after promising not to do so and to win reelection decisively. A VAT serves the Right's need for fiscal balance and the Left's need to expand social outlays, so it represents the ultimate "grand bargain" in American politics. It is a fair and sensible way to address the inequality that threatens our future.

Nonetheless, it is unlikely that any inflation from UBI could completely wipe out the improved purchasing power from the dividend, let alone make people worse off.

Q. How large is the long-run fiscal imbalance and what is driving it? How much has the COVID-19 pandemic added to the imbalance?

In June 2019, the Congressional Budget Office (CBO) projected that the federal government’s debt under current law would rise from 78 percent of annual gross domestic product (GDP) in 2019 to 144 percent in 2049.

Conservative critics worry that guaranteed income programs might affect recipients’ behavior by reducing their motivation to work or encouraging drug and alcohol abuse. But  support Yang’s claim that cash transfers have minimal impact on these behaviors. And  from a 2-year guaranteed income pilot program in Stockton suggest that programs targeted at low-income people reduce unemployment, allow people to pay down their debts, and improve their emotional well-being.

In addition, Americans’ recent experience with stimulus payments during the pandemic has shown us that this kind of support is immensely helpful, Yang says. “We know that money went to food, fuel, school supplies, and keeping a roof over people’s heads.”

The burden of a VAT would be shared by both firms and individuals alike as opposed to some of the more acute revenue generation options to be explored later. This would help to ease the negative sentiment that often comes as a result of raising taxes in the US. Because more of the burden would fall on firms (aside from small businesses, who are exempt from most existing VATs), the marginal increase on the current $1,131 average consumption tax burden would not be large, putting money in people’s pockets after receiving they receive the UBI that could be partially funded by a VAT. Considering the US’s small reliance on consumption tax and the shared burden of the policy’s design, a VAT is a valid possible source of additional revenue for a UBI, though it looks unlikely that it could cover all of the funding needed.

Border adjustments are taxes or tax exemptions that apply when payments for goods and services cross international borders. While familiar in the context of value added taxes, border adjustment has arisen in the context of possible U.S. tax reforms. In this regard, five points merit attention:

Border adjustments may be implemented as taxes on imports and rebates on exports, or by excluding overseas sales and purchases from the computation of taxable income;

A border adjustment makes sense for a domestic consumption tax like a VAT since exports are not consumed domestically, but imported goods and services are. This makes the border adjustment a policy that levels the playing field so that all goods consumed in the US face the same tax rate regardless of where they are produced. Thus, it is quite different from a selective tariff.

All advanced countries except the US already have VATs (on top of corporate income taxes), and all of those VATs are border-adjusted. The border adjustment for VATs is explicit – taxes on production are rebated for exports; imports are taxed.

What works on a national level in Europe may not work on the state level in the United States. If one state adopts a VAT while neighboring states do not, the inability of states to tax purchases from some out-of-state sellers will mean that some value added won’t be taxed, and sales made to other states will create the same problem. Put another way, a VAT cannot usually work in one state without a lot of help from other states.

A VAT would require the IRS, or a new agency, to establish an administrative apparatus, with its own forms, instructions, regulatory guidance, processing, taxpayer service, and collection and enforcement activities. Although much of this structure might be similar to what currently exists in the IRS, there would still be a new set of procedures and a new administrative structure whether or not the IRS administered the VAT. This would require a significant appropriation in advance of the VAT’s startup to establish the apparatus and pay for initial taxpayer education programs, and annual appropriations thereafter.

Parallel to the federal government’s administrative apparatus, businesses and other entities would have to establish the internal procedures they would need to learn about and comply with the VAT. Small businesses are assumed to be exempt from the VAT, but they would still have some compliance costs to learn about the VAT and determine whether exemption was in their best interests. Large businesses would be directly involved in collecting and remitting VAT. Nonprofit and government entities large enough to exceed the small business exemption level would be subject to VAT, entailing compliance costs similar to those of businesses subject to VAT.35

A border adjustment makes sense for a domestic consumption tax like a VAT since exports are not consumed domestically, but imported goods and services are. This makes the border adjustment a policy that levels the playing field so that all goods consumed in the US face the same tax rate regardless of where they are produced. Thus, it is quite different from a selective tariff.

All advanced countries except the US already have VATs (on top of corporate income taxes), and all of those VATs are border-adjusted. The border adjustment for VATs is explicit – taxes on production are rebated for exports; imports are taxed.

Existing cash transfer schemes are targeted more at households towards the bottom of the consumption distribution (e.g. those that are in poverty). However, they may not provide a suitable means of compensating households for the reduction in purchasing power they would face if the VAT base was broadened. The schemes remain relatively small-scale and tend to target subsets of the poorest parts of the population, often based on specific demographic or geographic eligibility criteria. Furthermore, the difficulty of implementing an effective targeting mechanism means that such programmes are generally subject to large inclusion and exclusion errors. Significant increases in the scale and coverage of such schemes would be required to offset the negative impact of VAT base broadening on households with low and middling levels of consumption. In these countries that is those below or close to the $1.90 and $3.20 international poverty lines.

A UBI/demogrant may provide an alternative means of compensating for a VAT rise. Our results indicate that broadening the VAT base and using the revenue to fund a UBI would boost the consumption of the least well off households and reduce extreme poverty and inequality – even if only 75% of the additional revenue was used for this purpose.19 There is of course a question of practicality with regards to the ability of LMIC governments to administer a nationwide cash transfer programme given administrative and information constraints. However, crucially such a programme would not require any targeting – only good registries of the population and reliable mechanisms for ensuring money reached intended beneficiaries. The fact that LMIC governments are increasingly able to manage more complex schemes that do require targeting suggests that this might not be an insurmountable challenge.

With the exception of the U.S., every country in the Organization for Economic Cooperation and Development has a value-added tax -- one on business sales that functions much like a retail sales tax. It’s time for the U.S. to join that club.

The is that they have a broad base, and they don’t discourage investment. They can raise a lot of money without causing nearly as much economic damage as income taxes. They are also much harder to evade than sales taxes.

The burden a VAT places on existing wealth avoids three key pitfalls of a direct wealth tax: The VAT’s wealth tax is extremely efficient because it is very difficult to avoid or evade; it does not require explicit valuation of particular assets; and it taxes excess returns, which is not distortionary, rather than taxing all returns, which is. But while this wealth tax is progressive by conventional standards, because the distribution of wealth is skewed toward the top, the burden imposed by the VAT is substantially less progressive than that of a direct wealth tax with a high exemption. While the burden of a VAT on existing wealth is imposed immediately upon enactment through a decline in the purchasing power of existing assets, the explicit tax payments arising from future consumption of existing wealth accrue only over potentially long periods. Still, the present value of long-term revenue from the burden a VAT imposes on wealth is at least equal to—and may well exceed, under plausible assumptions—the 10- year (undiscounted) revenue yield of the wealth tax proposed by Senator Elizabeth Warren.

A VAT also has important efficiency advantages over other types of taxes. Because VATs do not distort saving, investment, or financial decisions, they are more conducive to economic growth than income taxes or wealth taxes are. Because of the unique crediting structure that they employ, VATs are easier to administer and enforce than retail sales taxes. And by using border adjustments that remove taxes on exports but impose taxes on imports, VATs are consistent with other countries’ tax systems and avoid creating distortions in international trade.

Additionally, means testing can create a welfare “spider web,” which traps people within a state of poverty by eliminating assistance once people move slightly above the requirements. The current requirements of the U.S. welfare system encourage recipients to work, but only for the minimum wage, and not to improve further their living standard. This is because, after a certain threshold, means testing will determine that these families no longer need assistance. Consequently, net income could actually decline, if the enhanced wages in a better job do not exceed the minimum wage earnings plus welfare benefits. The result is that means testing creates a significant disincentive to find work that pays somewhat more, and this traps families near poverty.5 A UBI program avoids this difficulty. Those administering the program do not inquire into the needs of the people requesting the money. No one must prove that they need a UBI grant.

The proposed annual BIG of $10,000 would be paid directly by the Internal Revenue Service proportionately once a month. So, each month, every US citizen would receive one-twelfth of his or her $10,000 per annum, or $833 per month, payment as a direct deposit into his or her account. As indicated, this same amount would go into the accounts of the richest citizens, including Bill Gates and Warren Buffett, as well as our surfer.

In a recent letter, Timothy Roscoe Carter correctly notes that a universal basic income (UBI) financed by increasing progressive income tax rates would not subsidize the wealthy.1 Unfortunately, Carter incorrectly asserts that the “claim that UBI subsidizes the wealthy is valid” if the UBI is financed by a VAT, “at least for those wealthy enough to save a significant fraction of their incomes.”

In reality, a UBI is a highly progressive policy, even if funded by a regressive tax such as a VAT. A VAT-financed UBI would still impose net burdens on the wealthy (and would still provide net benefits to low-income households), although not to the same extent as an income-tax-financed UBI. Carter’s error reflects common misperceptions about the progressivity of taxes and spending.

Trump, however, may pursue populist, anti-globalization, and protectionist policies that hinder trade and restrict the movement of labor and capital. And he has cast doubt on existing US security guarantees by suggesting that he will force America’s allies to pay for more of their own defense. If Trump is serious about putting “America first,” his administration will shift US geopolitical strategy toward isolationism and unilateralism, pursuing only the national interests of the homeland.

When the US pursued similar policies in the 1920s and 1930s, it helped sow the seeds of World War II. Protectionism – starting with the Smoot-Hawley Tariff, which affected thousands of imported goods – triggered retaliatory trade and currency wars that worsened the Great Depression. More important, American isolationism – based on a false belief that the US was safely protected by two oceans – allowed Nazi Germany and Imperial Japan to wage aggressive war and threaten the entire world. With the attack on Pearl Harbor in December 1941, the US was finally forced to take its head out of the sand.