If the US administration were serious about addressing its trade and fiscal deficits, it would implement a federal value added tax (VAT) instead of broad-based import tariffs (“Waiting for a large new tax cut? GLWT”, FT Alphaville, FT.com, March 4).
America’s imbalances stem from excessive consumption: for every dollar earned, the average American spends roughly 95 cents, saves under 5 cents, and often relies on debt for additional consumption. At the same time, the federal government spends $1.39 for every dollar of revenue. As this twin deficit in the national accounts is financed by foreign investment, it corresponds to a trade deficit.
While Congress scrambles to fund further tax cuts, spending cuts alone will not tackle the nearly $2tn deficit. Estimates from Budget Lab at Yale suggest that a 10 per cent VAT could generate nearly $1tn in annual revenue. A VAT would encourage savings and more effectively reduce America’s self-inflicted deficits.
Nic Hein
Washington, DC, US