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Wednesday, April 21, 2010

Do We Need a VAT?


In the early 1980s, while the U.S. economy was suffering through a severe recession, Lester Thurow, dean of the business school at MIT and a Newsweek columnist, came up with what he thought was a great idea: a value-added tax. According to Thurow, a VAT would encourage production and discourage consumption, making it what he called a “true supply-side policy.”

Thank goodness not many people listened to Thurow. I hoped his suggestion would fall into the dustbin of Really Bad Ideas forever, but unfortunately, less than three decades later, the policy wonks in Washington are promoting this bad idea as the Next Economic Elixir.

First, what is a value-added tax? It is something like a sales tax, except that it is levied on the “value added” at each stage of production. Politicians and bureaucrats love it because consumers cannot separate the tax from the price of the products they purchase. They simply become used to paying higher prices for goods than they normally would pay without the tax.

Unfortunately, the Obama administration, which makes the Bush administration look fiscally responsible, has been urged to consider a VAT, according to the Washington Post:

At a White House conference earlier this year on the government’s budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama’s policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

“There is a growing awareness of the need for fundamental tax reform,” Sen. Kent Conrad (D-N.D.) said in an interview. “I think a VAT and a high-end income tax have got to be on the table.”

For now the White House says no. But how long will that last?

The VAT has been part of Europe’s fiscal landscape for years. According to the “We need to be more like Europe” crowd, this is something to envy. However, one needs to keep in mind that “being like Europe” is not a good thing, unless we really believe we should be working more than half a year for the State.

There is something else to consider: VAT rates have risen over the years, as governments become increasingly greedy for more money. An editorial in the Wall Street Journal points out:

One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe. From the 1980s through 2005, deficits were by and large higher in Europe than in the United States. By 2005 debt averaged 50 percent of GDP in Europe, according to OECD data, compared to under 40 percent in here.

In other words, once government finds a way to grab more money from taxpayers, it becomes even more voracious and expands its reach. With the U.S. economy still weak, the idea that a new tax that could take a couple more trillion dollars from Americans without hurting the economy is a bad joke.

To be blunt, we don’t need a VAT. We need a government that will spend far less. The U.S. government is broke, and grabbing more wealth in the long run will make the entire country broke.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.