Our grim fiscal outlook has led to renewed calls for a value added tax (VAT). As discussed by Greg Mankiw, conservatives have conflicting feelings about a VAT. The main appeal is that a VAT taxes consumption, so shifting from our current income tax system (which is actually a hybrid of an income tax and a consumption tax) to a VAT would remove existing disincentives to save, which in turn would promote long-term economic growth.

The early returns are coming in on the First-Time Homebuyer Tax Credit. And it appears to be a bigger boondoggle than even I thought it would be. At a House Ways & Means Oversight subcommittee hearing today, the Internal Revenue Service inspector general reported that the IRS is auditing more than 100,000 of the roughly 1.4 million returns that included a claim for the credit. This is a staggering audit rate for an agency that usually reviews only about 1 percent of returns.

Suppose that a taxpayer earns an additional dollar of income. How much tax would she owe on that dollar? A natural way to answer this question would be to look up the taxpayer’s statutory tax rate – the rate corresponding to her tax bracket and filing status. But that approach often gives the wrong answer and can mislead not only taxpayers but policymakers. Many tax preferences are phased in or out according to income, and as a result, those who earn extra income may face either a hidden tax or a subsidy as their tax benefits change in value. For example, for those in the phase-in range of the earned income credit earning an extra dollar increases the credit and reduces their tax liability, driving their actual rate below their statutory rate. But once they make enough so the EITC begins to phase out, the opposite happens and the rate they actually pay climbs.

Congress is absolutely right to end the decade-old fantasy that it wants to trim Medicare payments to doctors. This law has been on the books for 12 years and is annually ignored. Lawmakers should stop pretending. But I fear they will make this change without paying for it--adding $250 billion to the national debt over the next decade.

Last week the Congressional Budget Office quietly released its October Monthly Budget Review showing preliminary 2009 budget numbers. The $1.4 trillion deficit more than tripled the previous record of $459 billion set just last year (see top table). More than half of the increase was due to a $530 billion jump in outlays but 44 percent came from a 17 percent drop in revenues. That decline resulted in the federal government collecting a smaller share of taxes than at any time in the last half century.

The congressional fog is slowly parting and the fundamental issues of health reform are coming clear. And perhaps most controversial is the question of how Congress will pay for it all. Somebody’s taxes are going to be raised. But whose? And by how much? Despite the whining about 1000-page bills, there are only a few big moving parts to health insurance reform. It will require insurance companies to sell to all, regardless of their health. It will mandate that everyone purchase coverage (a trade-off rightly insisted upon by the insurers). It will create exchanges to make it easier for people to buy in the non-employer market. And it will create subsidies to help make those policies affordable. Finally, Congress has to pay for those subsidies.