Using a VAT for Deficit Reduction

Two ways of reducing the deficit are imposing a broad VAT with a rebate to offset the burden on low-income households and increasing marginal income tax rates. The prototype VAT would impose a larger burden on low- and middle-income households than raising income tax rates and increase compliance costs for taxpayers and administrative costs for the government, especially during a startup period. But the VAT would lead to a smaller increase in marginal tax rates on labor income than an income tax, not affect incentives to save and invest, and impose fewer, but not necessarily smaller, distortions on economic decisions.