The 10 Percent Solution

How progressives can stop worrying and love a value-added tax.

VATs have been considered before. During the 1920s, tax economist Thomas S. Adams discussed a VAT as a substitute for the even-then complicated system of corporate taxation. In response to concerns over the inequity and level of the property tax, Richard Nixon floated the idea of a VAT to help fund public schools in the early 1970s. In partial reaction to deep cuts in income taxes proposed by New York Congressman Jack Kemp in 1977 and endorsed by Ronald Reagan, some Democrats cast about for ways to reform the tax system, and House Ways and Means Chairman Al Ullman introduced a bill creating a 10 percent VAT in 1979. His subsequent defeat at the polls in 1980 put a chill on the VAT idea for years. These earlier efforts typically viewed the VAT as an element in a broader reform in which it replaced an existing tax that was viewed as either inadequate in producing revenues or overly complicated.

Introducing a new type of tax to the American people is a big lift politically. It has been done before, under special circumstances. The rarer case is a new tax introduced in response to a social movement railing against income inequality (the income tax, introduced in 1894, was deemed unconstitutional, then enabled by constitutional amendment in 1913). More common has been the introduction of new taxes in the face of war (the income tax became widespread during World War II) or profound economic distress with accompanying new roles for government (the payroll tax for Social Security and many state sales taxes introduced during the Great Depression).

This sense of urgency was missing in earlier considerations of a VAT. But now may be the time. The budget deficit has a new salience. At the same time, the recession has laid bare holes in the safety net and great needs at the state level. Public support for the major entitlement programs continues unabated. To maintain popular programs like Social Security and Medicare without catastrophic benefit cuts, and to put in place other protections for the middle class, we should aim for revenues that are 25 percent of GDP. But our low taxes present a problem: Where will we get the money to fund the protections and fuel the investments Americans need and desire? In a country with astonishing income inequality, where the top 1 percent have become separated from the rest of their fellow Americans, many progressives understandably would like to see multiple income tax brackets aimed at the very top slices of the income distribution, so that a CEO making $20 million is no longer paying the same marginal tax rate as his dentist who makes $250,000, a travesty that observers are now fond of pointing out.

But such changes are likely not in the offing. Conservatives have achieved their dream of eroding the income tax both fiscally and politically. Progressives should move to adopt a new tax that will provide the revenues needed to promote their agenda. A properly designed VAT can do just that.

This article is adapted from a white paper presented at “Funding America’s Priorities: The Possibilities and Politics of Raising Revenues,” a panel discussion sponsored by the Scholars Strategy Network in Washington, D.C., on February 25, 2010.

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