US Will Have to Tax Consumers: Economist

The U.S. will need to eventually enact national value added tax in order to raise revenue and decrease its deficit, Paul Donovan, MD & deputy head of global economics at UBS, said Thursday.

Taxing on the consumption side has typically never been the case in the U.S.

"The United States is the only OECD without a national value-added tax. And I think they are going to have to go down that route at some point," Donovan told CNBC.

"It's a cheap way of raising money. It is a very effective way of raising money. It is not a very equitable way of raising money — it falls disproportionately on lower income groups. So you may have to make some other changes to the tax code to try and compensate for that. But that is actually going to be a good way of raising money," he said.

US Debt Clock
US Debt Clock

Proposals for closing the loopholes allowing multinational U.S. corporations to not be taxed on profits until they are returned home have been muted by the U.S. government in its efforts to re-stabilize the economy.

Such proposals don't do a great deal in terms of tax revenues, according Donovan. "It is a one-off hit; it is not a sustainable hit," he added.

"We all know that taxes will go up in the United States. You just don't want to tell the U.S. consumer that. You leave them to go off to the shopping mall happy in the knowledge that their income is going to be unaffected for the time being," Donovan said.

"But it is not just about taxation. They are going to have to cut spending, no question about this," Donovan said, adding that the cuts would have to be implemented "across the board."

Over the last 11 years in the U.S. there has been a dramatic increase in government spending relative to history, Donovan explained.

The U.S. budget deficit currently stands at over $1.4 trillion.

  • Click here to watch the interview with Paul Donovan here