VAT is a net-positive for the poor – only a net-burden to the rich

This policy package can be made even more progressive by using a portion of VAT revenues to provide each household with a universal basic income (UBI) based on family size and composition. This benefit would be provided through quarterly payments to each family, for an annual reimbursement equal to two times the poverty line times the consumption tax rate. For example, with a 10 percent VAT, a family of four would receive about $5,200 back each year, compensating them for taxes paid on about $52,000 of consumption.4 Families that spend less than two times the poverty line would receive more from the UBI than they would pay in VAT. Families with higher spending would only face a net tax burden when they consume above two times the poverty line. Including the UBI, the VAT is remarkably progressive by conventional standards: aft er-tax income would rise by almost 17 percent in the lowest income quintile, remain virtually unchanged in the middle quintile, and fall by 5.5 percent among the top 1 percent of households.

Third, to avoid the VAT depressing the economy in the short run, most or all of the revenues collected in the years immediately following enactment should be spent on programs that stimulate the economy. For example, revenue from a VAT (aft er the adjustments described above) could be used to expand the UBI, restructure or reduce other taxes, pay for health care (Burman 2009), fund work incentives (Burman 2019), boost necessary government investments, or provide temporary stimulus, all of which would help off set any demand reduction from the introduction of the VAT. Over time, some of those uses could be scaled back so that revenues from the VAT could be used to reduce the federal debt.