Overcoming the Fiscal Trilemma with Two Progressive Consumption Tax Supplements

Abstract

This article recommends a tax reform strategy that can accomplish three objectives: raise sufficient revenue to deal with long-run budget challenges, promote long-run economic growth, and provide progressivity in the face of increasing inequality. The strategy for overcoming this fiscal trilemma is to retain (with modification) the personal income tax, the corporate income tax, and the payroll tax, and add two progressive consumption tax supplements: a value-added tax (VAT) made progressive by a refundable VAT credit on the 1040 and a progressive consumption surtax on the 1040.