But Sam and I were chatting about how the US can get away from the “fiscal cliff” and that turned our conversation to revenues and expenditures.

The GOP – until it caves – will fight any rise in “taxes” including tax breaks. The Democrats will not let a hair on an entitlement program’s head be touched. Impasse.

Thus the cliff and thus the entirely unsustainable US deficit. But writing in the New York Times (and pointed to by Instapundit) N. Gregory Mankiw slips in a suggestion “This could involve higher tax rates or an elimination of popular deductions. Or it could mean an entirely new tax, such as a value-added tax or a carbon tax.” nyt

Now, for reasons which my readers are well aware of, I think a carbon tax is bad policy. However, a VAT/GST/HST could make a lot of sense. Particularly if our American friends took a leaf from Hamilton’s book and dedicated such a tax to the repayment of the national debt.

US GDP is around 15.2 trillion. Federal Debt is 17.5 trillion. A modest VAT of, say, 6% would, in very round numbers, capture around 600 billion a year and, were that to be applied in full to the Federal Debt in addition to the various payments currently being made, the debt itself could be reduced very rapidly indeed. (The happy by-product of such a reduction would be a rapid decrease in the amount of the US Federal Budget which has to be applied to debt service.)

It would be interesting to see the effect of such a measure on the confidence with which the rest of the world views America…It certainly did wonders for the post Revolutionary United States.

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