Do We Need a Value-Added Tax to Solve Our Long-Run Budget Problems?

The U.S. budget is on an unsustainable path. That is because Social Security, Medicare, and Medicaid, which together constituted almost one half of noninterest spending before the recent stimulus plan, are all growing faster than tax revenues. If these programs are not reformed, tax burdens raised, or other spending decimated, deficits and the national debt will explode. It is difficult to imagine solving the entire budget problem by slowing spending growth, because benefits would then be far below those previously promised. It is equally unlikely that tax increases could solve the whole problem because the tax burden would then be so far above any ever experienced by Americans. To the extent that tax burdens are to be increased, there are three options. Tax rates could be raised in the existing system, but that would be extremely inefficient. Tax reform might raise revenues more efficiently, but that is excruciatingly difficult politically. That leaves the possibility of a brand new tax and a VAT is a very likely candidate.