The biggest long-term threat to fiscal responsibility is a value-added tax, as I’ve explained here, here, here, here, and here. So I’m delighted to see a growing amount of research showing that a VAT is bad news. Jim Powell has an excellent column at Investor’s Business Daily that makes a rather obvious point about the wisdom (or lack thereof) of copying the tax policy of nations that are teetering on the edge of fiscal collapse (this cartoon has the same message in a more amusing fashion).
Drums are beating in Washington for a value-added tax in addition to the “stimulus” taxes, health care taxes, energy taxes and other taxes President Obama has imposed and wants to impose on hard-pressed taxpayers. Supposedly a value-added tax is a magic elixir for curing budget deficits and excessive debt. Quack remedy would be more like it. If it worked, you’d observe that countries with a VAT had budget surpluses and no debt problems. But almost every country that has a VAT is plagued with budget deficits and excessive debt. … No surprise that the worst financial basket cases all have a VAT. Iceland has the highest VAT rates, but this didn’t prevent its financial crisis and the near bankruptcy of its government. Italy’s VAT rates are almost as high, and its debt exceeds its GDP. Financial crises are looming in Spain and Portugal, and of course they have a VAT. Greece has a VAT, too, and when politicians ran out of money to pay government employees for more than a year’s worth of work every year, they rioted in the streets. Great Britain has a VAT, and its government finances are in the worst shape since World War II — its budget deficit is expected to be bigger than that of Greece. Moreover, the OECD has acknowledged that “(VAT) tax and transfer wedges have discouraged firms from offering employment and individuals from taking it, reduced employment and increased inequality.”
And a new study by Douglas Holtz-Eakin and Cameron Smith finds evidence that a VAT would lead to bigger government.
VATs provide a significant amount of revenue. …But do these significant revenues cause government spending to grow larger? Or is it the case that adoption of a VAT is evidence of the desire for a larger government so that the causal arrow runs from a taste for Leviathan to a VAT, and not the reverse? …we find a statistically significant dynamic relationship between the rate of VAT taxation and the size of government. Although no single study is definitive, this is the first rigorous evidence that a VAT causes government to grow larger. …countries that adopted a VAT did in fact experience, on average, a 29 percent increase in the size of government. …The estimated coefficient of 0.262 indicates that adopting a VAT is associated with larger government. This estimate is statistically significant. …our results shift the burden of proof to those who deny that VATs fuel increases in the size of the public sector.
This study jumps into a long-running chicken-or-egg debate in the academic literature about whether higher taxes lead to higher spending or whether higher spending leads to higher taxes. This causality debate is interesting, but I’m not sure it really matters. A VAT is a terrible idea if it triggers bigger government, and a VAT is a bad idea if it merely finances bigger government. But I suspect this study is correct. The key thing to remember is that Milton Friedman was right when he warned that “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” This means that a VAT will allow more government spending and no reduction in deficits and debt, which is exactly what we see in Europe (and as Jim Powell noted in his column). Last but not least, this video summarizes the best arguments against a VAT.
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than […]
[…] This would be a terrible idea, even if at first the revenue was used to finance a lower corporate tax rate. Simply stated, it would just be a matter of time before the politicians figured out how to use the VAT as a money machine to finance bigger government. […]
[…] This would be a terrible idea, even if at first the revenue was used to finance a lower corporate tax rate. Simply stated, it would just be a matter of time before the politicians figured out how to use the VAT as a money machine to finance bigger government. […]
[…] The value-added tax is a pernicious levy. […]
[…] The value-added tax is a pernicious levy. […]
[…] we know from the European VAT evidence, this is a recipe for even bigger government. That’s a big downside […]
[…] is one of the reasons why a VAT would be a disaster for the United States. Politicians might make promises about repealing or reducing other taxes in exchange for a VAT, but […]
[…] years, I’ve been warning that a value-added tax (VAT) would be a terrible idea. Simply stated, politicians would have no reason to control spending or reform entitlements if they […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend […]
[…] stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend to […]
[…] stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend to […]
[…] political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so […]
[…] analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I […]
[…] that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I […]
very nice blog, good read A+
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
[…] Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax […]
Nice work Dan. That video is a great breakdown of VAT. The furniture supply chain example provided a pretty straight forward look at it. It’s pretty scary the way I look at it! Not only from a macro perspective but especially it’s direct effect on me personally, working in the income tax preparation business.