A Value-Added Tax and the Poor

A Value-Added Tax and the Poor

April 23, 2010

New York Times - Bruce Bartlett is more worried about middle-class and poor families not paying taxes than I am. But his latest Forbes column — about a value-added tax, or VAT — makes an important point:

[O]ne important benefit of a VAT insofar as those with low incomes is concerned is that they would be contributing something to the general cost of government. Everyone benefits from things like national defense, and everyone ought to pay something for it. But as it is, 47% of those filing federal income tax returns have either a zero or negative tax liability; that is, they pay nothing but still get a tax “refund.”

… The odd thing is that conservatives are the ones most likely to complain that the poor aren’t pulling their weight, yet they fail to see that a VAT is probably the only way of getting them to help finance the general cost of government. It’s extremely unrealistic to think we are ever going to impose income taxes on very many of those now paying nothing.

Given the rise in income inequality over the last three decades and the decline in tax rates for the affluent, these upper-income families probably need to bear a big share of the burden of deficit reduction. But they can’t come close to paying off the deficit by themselves. One way or the other, taxes need to rise on middle- and lower-income families, too (unless you favor making huge cuts to Medicare and Social Security).

A consumption tax, or VAT, seems a promising way to make this happen. Not only would it raise revenue. It would also encourage people to save more money — a bit of encouragement Americans could use.