Political Science Capstone
September 11, 2012
The Value Added Tax and Targeted Budget Cuts as a Means to Reduce the Federal Deficit
Deficit spending is a government action in which the amount of its expenditures exceeds that of its revenues. In other words, the government spends more money than it receives from its citizens through taxation. While such spending is generally considered necessary in turbulent economic times, recent annual trillion dollar deficits are alarming to say the least. To be sure, continued deficit spending threatens the very fiscal solvency of this country. Though it is reasonable to assume that both Democrats and Republicans agree as to its danger, there has been little agreement between them on how to implement a plan to reduce the deficit. Democrats by and large agree that a deficit reduction plan needs to include increased revenues, i.e. taxes. Republicans insist that the size of government should decrease, i.e. cut taxes. Despite the political volatility these two opposing ideas create, I believe that there is a way in which to do both. The question of deficit reduction then is: What is the most effective way in which to raise revenues and cut taxes? Overview
The reasons for the partisan disagreement over how to reduce the federal deficit are beyond the scope of this paper. Suffice it to say that the proper mix of budget cuts and increased revenue that Congress needed to implement to start to reduce the deficit resulted, not in legislation, but rather in an arbitrary post-election deadline that blindly slashes discretionary and mandatory spending by trillions of dollars (Kogan, 2011). In effect, lawmakers agreed that cuts needed to be made, but could not determine where and when to make them. In their defense, budget cuts are a conundrum among the electorate as well. Though we are generally opposed to increase in taxes and are favorable to reducing spending, there is little agreement among us on which programs should be cut and by how much. For example, the most obvious cuts would have to go to the federal government's three main expenditures: Social Security, Medicare, and Medicaid. Yet, in a recent poll conducted by the Program for Public Consultation, Americans roundly rejected cuts to Social Security (78%), Medicare (81%), and Medicaid (70%) (Kull, et.al., 2011)!
Though among the electorate there are misgivings about raising taxes in general, some support can be gained if it is the wealthy whose taxes are raised. President Obama has made raising taxes on the rich a hallmark of his tax reform plan. Raising taxes on wealthy individuals and married couples from 33% and 35%, respectively, to 35% and 39.6% would equal nearly a trillion dollars over the next decade in added revenue, according to the President's proposed budget plan (Anonymous, 2010). This plan makes sense in that America's tax code is progressive: the wealthy pay more than the poor. I believe in the progressivity of the tax code but I also believe it to be incredibly complex and porous; leaving much revenue uncollected. A better approach would be to work to "flatten" the tax code so that more revenue could be collected from a larger pot of taxpayers.
In order to add more desperately needed revenues, proposals need to be set forth by Congress that change but do not fundamentally alter the tax code. My hypothesis for how this should be done is as follows: The implementation of a value added tax (VAT) and a reduction in corporate taxes will increase federal receipts in the short term and long term and thus reduce the deficit. The reason for the use of the VAT is simple: it effectively raises receipts through consumption of goods. In fact, the VAT is often called a consumption tax because unlike income tax, it raises revenues by taxing what we purchase, not what we earn....