Archive for June 4th, 2009

As I explain in a Wall Street Journal column today, the value-added tax would be a disaster for America, enabling politicians to finance an even bigger government. In a previous post, I linked to an article I wrote for National Review. My WSJ piece updates the numbers and further confirms that a VAT is a recipe for European-style stagnation:

President Barack Obama is already looking at a wide range of other potential tax increases, including higher income tax rates, restrictions on itemized deductions, an energy tax, and higher payroll tax rates. Even if they all became law, the revenues would not come close to satisfying his and Congress’s appetite for bigger government, particularly a government-run health-care scheme. …Simply stated, there’s no way to finance all this new spending without an additional, broad-based tax. That’s exactly why a VAT — which is like a national sales tax collected at each stage of the production process, rather than at the final point of sale — should be resisted. …VATs are associated with both higher overall tax burdens and more government spending. In 1965, before the VAT swept across Europe, the average tax burden for advanced European economies (the EU-15) was 27.7% of economic output, roughly comparable to the U.S., where taxes were 24.7% of GDP, according to data from the Organization for Economic Cooperation and Development OECD). European nations began to impose VATs in the late 1960s, and now the European Union requires all members to have a VAT of at least 15%. Results? By 2006, the OECD reports that the average tax burden for EU-15 nations had climbed to 39.8% of GDP. The tax burden also has increased in the U.S., but at a much slower rate, rising to 28% for that year. The spending side of the fiscal equation is equally dismal. In 1965, according to European Commission figures, government spending in EU-15 nations averaged 30.1% of GDP, not much higher than the 28.3% of economic output consumed by U.S. government spending. According to 2007 data, government spending now consumes 47.1% of GDP in the EU-15, significantly higher than the 35.3% burden of government in the U.S. Another argument for the VAT concedes it will increase the overall tax burden but preclude higher taxes on personal income and corporate income. The evidence from Europe says otherwise. Taxes on income and profits consumed 8.8% of GDP in Europe in 1965, giving Europe a competitive advantage over the U.S., where they consumed 11.9%. By 2006, OECD data show that the tax burden on income and profits climbed to 13.8% of GDP in Europe, slightly higher than the 13.5% figure for the U.S. …The income tax system we have today is a nightmarish combination of class warfare and corrupt loopholes. Adding a VAT does not undo any of the damage it imposes. All that happens is that politicians get more money to spend and a chance to auction off a new set of tax breaks to interest groups. That’s good for Washington, but bad for America.

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