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Paying for the Pandemic: The Case for a New Revenue Source

Posted on June 24, 2020

In part two of our three-part series: Paying for the Pandemic, watch William G. Gale, co-director of Urban-Brookings Tax Policy Center, make a case for raising revenue with a progressive value-added tax.


Here are a few highlights…

On forecasting the GDP ratio

William G. Gale: The estimates that we did [in my article] involve this scenario called current policy, which involves taking the current law baseline and extending temporary tax provisions and maintaining per capita spending levels . . . It's a little odd that Congress tells [the Congressional Budget Office] how to make its forecast. So, what we try to do in the current policy projections is use more politically reasonable assumptions . . . Our estimates had the debt to GDP ratio going 180 percent 30 years from now before the pandemic. CBO now estimates that the debt to GDP ratio will rise by 28 percentage points in the next couple of years, as opposed to being relatively constant in its forecast before the pandemics.

So, I'm not sure if the debt hit will turn out to be a onetime shock due to the stimulus that we pass or that we will pass . . . a lot of it depends on the path of the economy. If we have a V-shaped recovery and the economy goes back to full employment quickly, then there will just be this one-time boost in the debt to GDP ratio; and then it'll continue on its former path just elevated by 28 percentage points. If the economy recovers slowly and CBO predicts we don't get back to pre-COVID projected level of GDP until 2029, in that case, you'd expect a bigger increase in the debt to GDP ratio. And that's by no means a worst-case scenario. In the Great Recession, the economy never recovered to what it was before the recession. So, if that happens again here, then of course we're going to see continuing increases in the budget deficit.

On the need for a new revenue source

William G. Gale: I think we're going to need the new revenue source for a couple of reasons. One is if we overweigh our income tax the way that would be required to raise that amount of revenues, we would not be as competitive with other countries. Other countries rely on the VAT as well as income and corporate tax, and they use the VAT revenues to help keep their income and corporate tax rates down; and that seems like a good strategy.

The VAT is an extremely popular revenue option worldwide [for] over 168 countries . . . So, I don't want to fall on my sword that we have to have that; I'd be delighted to hear other ways of raising the revenues, but I think it's important to have the serious policy options on the table; and certainly that is a serious policy option. I guess I would add one more thing to it in the paper . . . I think we could need to consider various forms of a wealth tax, but those taxes do not raise enough revenue to close the gap. We will need to close what you might call the revenue portion of the gap, so I view the VAT as a compliment to those proposals, not a substitute.

On why a VAT may be preferable to a national sales tax

William G. Gale: A VAT solves a lot of the problems that are created in a retail sales tax . . . retail sales taxes omit a variety of goods and services which gives bigger tax cuts to high income people than low income people. They gain a lot of their revenues from taxing business sales, which is a mistake for a consumption tax. They don't do well taxing interstate sales, or what used to be called mail order or internet sales, even in the apps, even in the aftermath of Wayfair. A national value added tax would solve all of those concerns. At the national level, you could make the base cover all goods and services.

Once a federal VAT [was] in place, the states could piggyback on top of it [and] set whatever rate they wanted. They could literally have the federal government administer the tax and simply send them 6 percent of the value added or 3 percent of the value added, whatever their rate is. So, in terms of administration and coverage, I think the states could actually benefit dramatically from a federal VAT rather than the federal government copying the state retail sales tax model.

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