A crushing value-added tax (VAT) is becoming increasingly inevitable as Washington fails to address a coming explosion in entitlement spending, predicts Fortune magazine.
Because a VAT is based on what you buy, not your income, it would crush the middle class, warns Shawn Tully, Fortune’s senior editor-at-large.
Spending will start to explode after 2018, as an aging population turns to Medicare and Social Security.
Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video
By 2028, we'll need another $1 trillion in revenue, which would call for a 37 percent increase in income taxes. The current income-tax system, he calculates, simple won't be enough for those kinds of numbers. Because the gap between spending and revenue will be so huge, the most likely solution will be a European-style VAT.
"By 2018, the budget picture — in the absence of major structural reforms to entitlements — will start unraveling at shocking speed," he warns. "Without tax increases or action on entitlements, debt-to-[gross domestic product] would exceed 100 percent and soaring interest payments would threaten America with insolvency."
Cutting entitlement benefits is the only way to avoid the coming budget crisis, but reform must start soon. The longer Congress waits to overhaul Social Security and Medicare, the more politically difficult reform will be because more baby boomers will be closer to retirement.
"If Washington gridlock persists, the big new tax is a virtual certainty," he writes.
The United States could benefit from a VAT, according to Reuters, which notes that it's the only large developed country without one. The tax could replace other taxes, especially corporate taxes, and help boost competitiveness and growth, writes Martin Hutchinson for Reuters Breakingviews.
Tax credits and other tools could make it less regressive.
"If concerns about penalizing the poor can be overcome, a simple VAT that could make America more competitive ought to have broad appeal," Hutchinson writes.
Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video
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