Tyler Cowen on the possible need for a VAT

1. The United States is on an unsustainable fiscal path.

2. For whatever reason, long-term interest rates don't reflect this problem. There will either be a sudden collapse of demand for government securities, or the current market already is figuring we will get a VAT. Either way it is more revenue for the government or a Greece-like scenario writ large.

3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum. They might be willing to cut spending once a financial crisis arrives (though maybe not), but then there will be days or only hours for decisive action.

4. We could, for now, wait and postpone fiscal reform. That means encountering a sudden collapse some number of years from now. We will then clean up the budget in some way, but under a TARP sort of mood rather than what we might do today.

5. We'll get a better deal, and make wiser decisions, if we do it today rather than in a panic. Plus another financial crisis would prove deadly to both the budget and to the quality of economic thinking.

6. 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.