Progressives for a value-added tax?
Via Megan McArdle is this interesting graph from the Congressional Budget Office showing the impact the recession has had on tax revenues, organized by type of tax:
I am also surprised to see that revenue from payroll taxes has essentially remained stable through the recession, and like Megan, I’m not entirely sure as to why that is (and if anyone wants to hazard a guess, I am all ears).
What’s more interesting to me though, is what this graph implies about the volatility of revenue. Assuming that this is an accurate representation of what happens to tax revenues during a recessionary period, it seems to suggest that our most progressive taxes – income taxes – are most vulnerable to the effects of a recession, while our most regressive taxes – payroll taxes – are our least volatile sources of revenue. And if that’s true, then it has powerful implications for progressive policies.
Since Obama entered office, I’ve gradually come to the conclusion that, above nearly everything else, progressives need to make a concerted effort to change the way we talk about taxation, in the interest of clearing the space for politicians to talk honestly and openly about raising revenue. After all, we don’t have much of choice. Most progressives are committed to significantly broadening the scope of the American welfare state; health care is only one part of what is a long-term effort to bring the United States more in line with our European peers in terms of what the state delivers to its citizens. Taxation plays a critical role in furthering that project. We simply can’t expand the welfare state without also raising dramatically more revenue than we currently do, since in the absence of any additional revenue, the United States cannot afford much beyond its current obligations (or rather it could, but it’s nice to be able to pay for what we spend).
The problem for progressives is twofold: first, we have to find a way of successfully countering the conservative narrative that taxes are unfair at best and borderline illegitimate at worst, and second, we have to find methods of taxation that are both fair and capable of raising an adequate amount of revenue.
Of the two, I actually think that the second is a far more difficult project, in part because the best solution – a value-added tax of some form – is anathema to a lot of progressives. For progressives, the VAT is simply too regressive; every imaginable form of the VAT would disproportionately affect poor, working-class and middle-class Americans. That said, there are ways to craft a VAT as to soften its impact. For starters, you could include exemptions for food and non-luxury clothing items, as well as use some of the revenue – Bruce Barlett estimates that a 20 percent tax could raise up to $1 trillion per year in 2009 dollars – to provide income supports for struggling Americans. Indeed, if you buy the idea (which I do) that progressive distribution is far more important than progressive taxation, then a VAT is great by progressive standards, as the revenue generated could be used to support both a stronger safety net and significant investment into education and infrastructure. What’s more, the stability of regressive taxes makes it more likely that you can expand the welfare state while also keeping it fiscally solvent over the long-term.
I don’t expect conservatives to sign on to this project (though it’s worth noting that the United States wouldn’t be the first nation to trade conservative taxation for progressive spending), but I think it’s something they should consider. If you believe – as I do – that the United States is on a pretty steady march towards a much stronger public sector, then we must raise revenues one way or another. Considering the alternatives – massive tax hikes on the rich, which depending on the form they take, I’m not necessarily opposed to – a VAT is probably the best possible outcome for conservatives.