To be unaware of the danger that VAT can be used as a (sort of) stealth tax would to be naive, but the fact remains that, together with spending cuts, it may be one of the least unpalatable ways of dealing with the current budgetary mess. To rule out VAT ”on principle” leaves one asking exactly what that principle might actually be.

In this context it is well worth remembering that some of the proposed entitlement reforms, such as (more) Medicare means-testing, are themselves (in effect) taxes — and, I’d add, would discourage the long-term increase in the savings rate that is essential for turning things around in this country.

Over at Marginal Revolution, Tyler Cowan has some sensible things to say on VAT. This, in particular, struck me as interesting:

There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax. Spend some of the rest on health care for the poor, if that is the deal on the Democratic side.

Whilst on this depressing topic, Martin Wolf’s FT piece yesterday is well worth a look. I’d highlight this part:

Jumps in fiscal deficits are the mirror image of retrenchment by battered private sectors. In the US, the financial balance of the private sector (the gap between income and expenditure) shifted from minus 2.1 per cent of GDP in the fourth quarter of 2007 to plus 6.7 per cent in the third quarter of 2009, a swing of 8.8 per cent of GDP (see chart). This massive swing occurred despite the Federal Reserve’s efforts to sustain lending and spending. Similar shifts occurred in other crisis-hit countries.
If these governments had decided to balance their budgets, as many conservatives demand, two possible outcomes can be envisaged: the plausible one is that we would now be in the Great Depression redux; the fanciful one is that, despite huge increases in taxation or vast cuts in spending, the private sector would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. This is to believe in magic. The huge increases in fiscal deficits were appropriate to the circumstances. The only way to have avoided them would have been to prevent prior expansions of private credit and debt. But Prof Ferguson is right: everybody knows that such deficits cannot continue indefinitely… [O]nce ratios of public debt to GDP exceed 90 per cent, median growth rates fall by 1 per cent a year. That would be costly. Moreover, there is a risk that, at some point, confidence would be lost and interest rates would soar, with dire impact on debt dynamics.

The word “risk” is an understatement.