James Pethokoukis

Politics and policy from inside Washington

CBO’s Elmendorf on the VAT

April 8, 2010

The Weekly Standard reports some interesting bits from a breakfast chat by Congressional Budget Office Director Doug Elmendorf. The charming Mary Katharine Ham has some quotes:

1) “Many people in Congress are interested in it,” he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it’s been implemented. “We’ve had conversations with a number of members and their staffs.”

2) Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 budget deficit, which the CBO predicted will be 90 percent of GDP: ”That would put us in a very select group of developed countries,” he said. “There are relatively few developed countries that have debt-to-GDP ratios that high.

3) “Economists think about people deciding how hard to work or how many hours to work,” he said, explaining that the decision to take a higher paying job or work more hours is partly based on being able to buy more stuff with one’s money. “Any wedge between value you’re producing for your employer and what you can buy is a wedge that can distort. It is still a tax.”

4) “If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to,” he said. “The VAT tax itself could become very complicated.”

5) “It’s not impossible that the [deficit]problem could go away,” he said. “It’s also no less possible that it could get a lot worse.” The CBO’s 90-percent figure was intended to fall somewhere in the middle of all possible outcomes.

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