DISTRIBUTIONAL ASPECTS OF A FEDERAL VALUE-ADDED TAX

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Abstract
To many policymakers, a Federal valueadded tax presents a way to reduce the budget deficit without adversely affecting savings. In previous debates the regressivity of the tax has proven to be a significant barrier to its political acceptability. Using a newly-developed measure of income, this paper evaluates the regressivity argument and analyzes options for reducing the regressivity of this tax. The paper concludes that the tax burden on the lower income groups can be reduced most effectively by providing payments to lower income groups, rather than by relying solely on automatic transfer payment adjustments or on exempting "necessities."

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