With debt held by the public projected to reach a record high by 2030, identifying solutions to stabilize our fiscal outlook is increasingly urgent. The growing debt is driven by a structural imbalance between federal spending and revenues, which makes tax reform a key lever on one side of the ledger to explore for closing the gap.

A new report from the Tax Foundation breaks down the drivers of the fiscal imbalance and concludes that tax increases alone cannot solve the problem. The report evaluates a range of proposed tax policies for their effectiveness in stabilizing the budget, including increasing individual and corporate income tax rates, raising tariffs, expanding payroll taxes, taxing employer-sponsored healthcare, establishing a wealth tax, and instituting a value-added tax.

The Tax Foundation’s findings include:

1. Negative economic effects such as slower growth and avoidance behavior erode the positive benefits of many tax reforms to some degree — but the extent varies based on the design of the tax.
2. As a broad-based tax, a value-added tax (VAT) would generate more sustainable revenues over the long run than narrowly targeted policies that apply to a smaller subset of taxpayers, such as raising the top individual income tax rates. Under a 5 percent VAT, publicly held debt would reach 121 percent of gross domestic product (GDP) by 2056, significantly lower than under alternative policies.
3. Of the nine options modeled, a 5 percent VAT would also be the most effective at closing the primary deficit in the short run. The primary deficit is currently projected to equal 2.38 percent of GDP in 2027; the VAT could significantly offset the gap by raising 1.76 percent of GDP in revenues.

The latest report from the Tax Foundation describes the budgetary challenges facing the United States and the extent to which changes in tax policy can address our fiscal imbalance. The report focuses on the potential for tax reforms in this exercise, discusses the relative strengths and limitations in different approaches, and concludes that a VAT is probably the most effective tax tool to raise revenues with minimal impact on economic activity.