The Value-Added Tax: Key to Deficit Reduction?

By Charles E. McLure Jr.; Mark A. Bloomfield | Go to book overview

2
The Need for a Value-added Tax

Many Americans concerned about fiscal affairs seem to be increasingly convinced that a new source of federal revenue must be found. Although this perception appears to be shared across the political spectrum, a variety of very different reasons probably underlie the common perception.

Many observers, of all political persuasions, believe that the federal budget deficit must be substantially reduced, if not eliminated. 1 Again, concern about the budget deficit has a variety of roots. At one level is the simple intuitive belief that the federal government must pay its own way over the long haul, just as households must, and that continued deficit finance will eventually become inflationary and lead to a need for difficult adjustments to eliminate inflation.

A more sophisticated version of this view is based on the realization that the federal government is not merely borrowing from its own citizens. Rather, because the private saving rate has not risen since the federal government began to run massive budget deficits in 1982, the nation (on combined public and private account) has been borrowing substantial amounts abroad. During 1985 the United States resumed the status of a net debtor—a position more appropriate to a developing country. Thus it can no longer be said sanguinely of the national debt that "we owe it to ourselves." The reduction in net international balances of the United States seems anomalous to many observers. Why, they ask, should the richest nation in the world not be able to pay its own way? Some observers find it unconscionable that the United States should be absorbing so much of the world's scarce supply of net saving, when countries of the third world need capital so badly.

A somewhat different concern has focused on the implications of budget deficits for international trade. The higher real interest rates resulting from the budget deficit have stimulated capital inflows. Borrowing abroad has led to an overvalued dollar, which has made it

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