Reich: Value Added Tax Is a Bad Solution to Big Deficit

Economists Martin Feldstein and Robert Reich agree a value added tax (VAT) is a poor solution to America's deficit problems.

“Any tax that hides itself is not a good tax,” Reich says, and VATs are hidden because most are levied on production, which means consumers don’t know how much tax they are paying.

Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton, told CNBC that he is also concerned about the VAT’s inherently regressive nature because it takes equally from the rich and the poor.

Feldstein agrees with Reich that a VAT would be regressive. “Half of all Americans who file tax returns don’t pay any tax, but they would pay a value added tax every time they bought something,” he says.

Feldstein would like to limit the Obama administration’s tax cuts for everybody below the top two tax brackets and reduce spending.

“We don’t want to have a 100 percent reduction in the taxes as proposed by the administration for everybody under $200,000,” he says. “That would cost more than $2 trillion over the next 10 years.”

Reich says there’s some room to raise marginal income taxes on the top income levels.

“Let’s remember that under Dwight Eisenhower, whom nobody ever accused of being a radical, the rate was 91 percent (and) the effective rate was closer to 60 percent,” says Reich, now a professor of public policy at the University of California at Berkeley.

Reich suggests creating a separate capital or investment account in the federal budget for the part of domestic discretionary that is really public investment like infrastructure and education, and doing some major trimming in defense expenditures in years to come.

Reich and Feldstein also agree that Medicare and Social Security are the two biggest federal budget concerns.

“We need to stop financing those 100 percent by taxes … and move to a mixed system in which we combine some tax finance … with an investment-based part,” Feldstein says.

“I think that’s the direction we should be going.”