The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.
The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.
So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*
And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.
Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.
As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.
Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.
For more information, here’s my video that describes the VAT and explains why it’s a bad idea.
*The same thing is now happening in Japan.
P.S. I don’t know if you’ll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.
[…] also important to look at VATs, which increase the wedge between pre-tax income and post-tax […]
[…] also important to look at VATs, which increase the wedge between pre-tax income and post-tax […]
[…] did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe. Nor did he say “let’s impose very high income tax rates on ordinary people” like they do in […]
[…] He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe. […]
[…] He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe. […]
[…] without unambiguously and permanently getting rid of the income tax (so that we don’t repeat the European mistake of giving politicians a way of expanding […]
[…] without unambiguously and permanently getting rid of the income tax (so that we don’t repeat the European mistake of giving politicians a way of expanding […]
[…] tax rules” (but helped by a good score for consumption taxes since the U.S. has not made the mistake of imposing a value-added […]
[…] tax rules” (but helped by a good score for consumption taxes since the U.S. has not made the mistake of imposing a value-added […]
[…] always a bad idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] Actually, you probably only get to benefit from the use of about 40 percent of your income in those two nations when you factor in the value-added tax. […]
[…] Actually, you probably only get to benefit from the use of about 40 percent of your income in those two nations when you factor in the value-added tax. […]
[…] always a bad idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] bottom line is that it’s never a good idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] always a bad idea to give politicians a new source of […]
[…] government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and […]
[…] government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and […]
[…] government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and […]
[…] That’s true with the death tax. It’s true with the carbon tax. It’s true with the value-added tax. It’s true with the financial transactions […]
[…] the evidence from Europe, which shows not only that the burden of government spending increased after the VAT was adopted beginning (see chart at start of column), but also that government debt […]
[…] So we should keep the income tax as a vehicle for class warfare and augment it with a VAT?!? Yeah, good luck trying to sell that idea. And Heaven help us if it ever succeeded since politicians would have another major source of tax revenue. […]
[…] Instead, many politicians in the United States want to keep the income tax and also impose a VAT so they can finance a bigger burden of government – which is exactly what’s been happening in Europe. […]
[…] So we should keep the income tax as a vehicle for class warfare and augment it with a VAT?!? Yeah, good luck trying to sell that idea. And Heaven help us if it ever succeeded since politicians would have another major source of tax revenue. […]
[…] high score for “consumption taxes,” which largely is because we haven’t copied the mistake of other nations and imposed a value-added […]
[…] Especially not in Europe, where politicians have been increasing the VAT with disturbing regularity. […]
[…] agenda. If Washington ever tried to adopt even part of his platform, it inevitably would mean a European-style value-added […]
[…] to say, one of the main lessons from this sordid experience is that it’s never a good idea to give politicians a new source of […]
[…] rule, this means ordinary European taxpayers are suffocated with high payroll tax burdens, onerous value-added taxes on consumption, and income taxes that impose high rates on modest […]
[…] the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it […]
[…] the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it […]
[…] P.S. There already are rules for harmonized VAT taxation in Europe, which predictably has enabled ever-higher tax rates. […]
[…] of the revenue, as you can see. But keep in mind that all of these countries also have onerous (and ever-increasing) value-added taxes, as well as other […]
[…] that has happened since that video was released in 2009 underscores why it would be incredibly misguided to give […]
[…] what it’s worth, based on all the post-financial-crisis tax increases that were imposed in Europe, I suspect that the Higgs hypothesis is still very […]
[…] share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes.The authors would argue that Europeans get “robust public institutions” in exchange for all […]
[…] to keep in mind when the crowd in Washington says we should have a value-added tax. Based on what’s happened in Europe, I guarantee it would just be a matter of time before that tax became more onerous to finance an […]
[…] I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax. […]
[…] Those are remarkable numbers. Income taxes grab a much bigger share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes. […]
[…] The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time. Even if we looked just at European governments that are part of the OECD, the numbers are even more depressing. […]
[…] the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly […]
[…] don’t forget the chart I shared showing how the VAT has jumped significantly in Europe in the past few […]
[…] Unless, of course, you want bigger government and more red ink. […]
[…] taxpayers make purchases in Europe, they don’t know that VATs are responsible, on average, for about 21 percent of the purchase […]
[…] make purchases in Europe, they don’t know that VATs are responsible, on average, for about 21 percent of the purchase […]
[…] I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax. […]
[…] this new source of revenue. Why would they ever reform entitlements, for instance, if they had the ability boost the VAT rate by a point or two every few years? With that in mind, I’m perplexed and horrified that some […]
[…] been much “austerity” over the past decade (other than higher income taxes and higher VAT taxes, which means taxpayers have taken a hit but not bureaucrats and interest […]
[…] receipts tax would almost disappear. So is this a good deal? Part of me says no because it’s never a good idea to give politicians a new source of tax revenue. But the fact that the measure is opposed by many […]
[…] governments all levy onerous value-added taxes that raise costs for all […]
[…] To be sure, there have been big fiscal changes in Europe. The bad news is that those changes have been big increases in income tax rates and big increases in value-added tax rates. […]
[…] is a huge omission. The average VAT in Europe is now 21 percent, so the actual tax burden on taxpayers in other nations is actually much higher than shown in the […]
[…] is a huge omission. The average VAT in Europe is now 21 percent, so the actual tax burden on taxpayers in other nations is actually much higher than shown in the […]
[…] over the past few decades has backfired. And we can also confirm that the big income tax hikes and increases in value-added taxes in more recent years have made matters worse rather than […]
[…] because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and Japan). Before the VAT, the burden of government spending wasn’t that much higher in […]
[…] is exactly what happens in Europe. Look at how recent VAT hikes have been paired with higher income tax […]
[…] VAT DisasterHostility to the VAT is justified by the European experience. Back in the mid 1960s, the burden of government spending in Europe was only slightly above the […]
[…] tax (VAT), which is tempting because of its revenue-generating capacity. …Hostility to the VAT is justified by the European experience. Back in the mid 1960s, the burden of government spending in Europe was only slightly above the […]
[…] (VAT), which is tempting because of its revenue-generating capacity. …Hostility to the VAT is justified by the European experience. Back in the mid 1960s, the burden of government spending in Europe was only slightly above the […]
[…] To be sure, there have been big fiscal changes in Europe. The bad news is that those changes have been big increases in income tax rates and big increases in value-added tax rates. […]
[…] so often, I get asked why I’m so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in […]
[…] look at the evidence from Europe if you’re not […]
[…] here’s a chart showing what’s happened in the past few years to the average VAT rate in the European […]
[…] here’s a chart showing what’s happened in the past few years to the average VAT rate in the European […]
[…] terrible idea. Politicians might promise to use the revenue to lower or eliminate other taxes, but the European evidence shows that the long-run impact is to finance a much larger burden of government […]
[…] politicians in developed nations have been raising taxes over and over again, so perhaps we should conclude that higher taxes simply lead to more debt because our […]
[…] politicians in developed nations have been raising taxes over and over again, so perhaps we should conclude that higher taxes simply lead to more debt because our […]
[…] So we should keep the income tax as a vehicle for class warfare and augment it with a VAT?!? Yeah, good luck trying to sell that idea. And Heaven help us if it ever succeeded since politicians would have another major source of tax revenue. […]
[…] it’s worth noting that the Europeans also have been increasing the VAT in recent […]
[…] P.S. High-tax nations have succeeded in eroding tax competition in the past five years. The politicians generally claimed that they simply wanted to better enforce existing law. Some of them even said they would like to lower tax rates if they collected more revenue. So what did they do once taxpayers had fewer escape options? As you can probably guess, they raised personal income tax rates and increased value-added tax burdens. […]
[…] But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates. […]
[…] And it’s also worth noting that VAT rates in recent years have jumped significantly in both Europe and […]
[…] And it’s also worth noting that VAT rates in recent years have jumped significantly in both Europe and […]
[…] My view, for what it’s worth, is that this is another piece of evidence showing that the VAT is a money machine for big government. Not just in Japan, but also in Europe. […]
[…] P.P.S. If the income tax facilitated today’s bloated government, it should go without saying that giving politicians another big source of revenue would lead to an even bigger burden of government. That’s why the value-added tax is such an awful idea. […]
[…] already been busy raising personal income tax rates and increasing value-added tax burdens, but that’s apparently not sufficient for our greedy […]
[…] So we should keep the income tax as a vehicle for class warfare and augment it with a VAT?!? Yeah, good luck trying to sell that idea. And Heaven help us if it ever succeeded since politicians would have another major source of tax revenue. […]
[…] So we should keep the income tax as a vehicle for class warfare and augment it with a VAT?!? Yeah, good luck trying to sell that idea. And Heaven help us if it ever succeeded since politicians would have another major source of tax revenue. […]
Good stuff and absolutely right.
From a Brit perspective it was always interesting to me that in the mid-1970s, otherwise sound people in the think-tanks such as IEA and CPS were all up for VAT as it was seen as less destructive of growth than direct taxes on income. Indeed once of Mrs Thatcher’s first acts was to slash income tax rates while jacking up VAT.
But of course, as with all taxes it was never ‘either/or’ and we end up with both income tax AND VAT, to say nothing of all the rest…!
A VAT cannot be good for growth.
An increase in the VAT increases prices across the board. Those with after-tax income must buy less or save less. Those who receive additional redistributed income through government also buy consumables at elevated prices.
In the best case for the VAT, consumption decreases for income earners are offset by consumption increases by the dependent, with no change in growth.
In every other case, savings must decrease, forcing a reduction in growth enhancing investment.