Tuesday, December 2, 2008

How are we going to pay for it all?

An interesting article by Shawn Tully in Fortune on the prospects of a Value Added Tax in the U.S. to finance rising entitlement spending. I'm briefly quoted in the article, but here are my quick thoughts:

If health and pension cost continues to rise as projected, we'll be looking at European-levels of government spending – think 30 percent of GDP rather than 20 percent – but financed with an American-style tax system (here think a progressive income tax with relatively low payroll tax rates and no national sales tax). I'm not sure how well these go together. A top income tax rate of 40 percent is one thing; a top tax rate of 50 or 60 percent is another. In the E.U., higher government spending is financed through a tax code that focuses more on flat or regressive taxes, such as payroll taxes or sales taxes, than on progressive income taxes. A VAT is generally a more efficient way to raise revenue than income taxes, since it taxes consumption rather than saving or labor, but the distributional outcomes may be significantly different than what we've come to expect in the U.S.

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