VAT raises money by taxing the rich, not the poor

This chapter proposes a new progressive, national consumption tax: a broad-based, credit-invoice value-added tax (VAT), sometimes referred to as a “goods and services” tax. The most intuitive way to understand the VAT is that it is like a retail sales tax, but with tax revenue that is collected in parts at each stage of production rather than all at once at the retail level.2 Similar to a tax imposed in New Zealand, this VAT would tax a broad base that includes items that other countries’ taxes typically omit: education, health care, financial services, and nonprofits. To maintain parity with the private sector, federal, state, and local government spending would be taxed too, but this taxation of government spending would not raise net revenues, because the federal government cannot raise net revenue by taxing itself and because the proposal would reimburse subnational governments for the VAT they pay. Coupled with a universal basic income that varies with family size and composition, the VAT can raise substantial amounts of revenue in a progressive fashion.

The proposal comes with five important provisions and considerations. First, the VAT proposed here is intended to work in conjunction with other, highly progressive policies, like an ongoing direct wealth tax, capital gains reforms, or other policy changes that raise taxes on well-to-do households. As noted throughout this volume, there are important reasons to raise tax burdens on high-income and high-wealth households relative to others, so this proposal should be read as a complement to—not a substitute for—other ways to raise taxes on the rich.3 This is because taxes on highincome and high-wealth households, by themselves, are not likely to raise sufficient revenue to allow the federal government to control debt, invest in the economy, and provide payments to the elderly (Gale 2019). In addition, pairing a VAT with these policies is likely to make them more effective. One of the easiest ways for higher-income households to avoid wealth taxes or income taxes is to consume more—an avenue that a VAT makes less attractive. Finally, and perhaps most importantly, in light of secular increases in income and wealth inequality, it is inappropriate to ask the middle class to pay the higher taxes a VAT entails without also enacting substantially higher levies on high-income and high-wealth households.