Who's Worse, Wall Street Fat Cats or Political Vat Cats?

By Grant Davies

Dan Mitchell of International Liberty argues it's game over if the US ever goes for a VAT like the Europeans have. I say Romney, and indeed all Republicans, should take a pledge against this nonsense.

1 comment:

  1. There are merits and demerits to this guy's description.

    Here is a more comprehensive discussion of his main points that also highlights the benefits. The Heritage Foundation agrees with Cato, but see my exceptions below.

    First off, there's nothing inherently bad about a VAT. It has been proven that a VAT and income tax are functionally equivalent, i.e. that you can make the revenues of a VAT equivalent to any income tax structure and vice versa.

    The advantage of a VAT is that it requires far less government administration in order to collect it. VATs are harder to avoid. In those respects, a VAT is clearly superior. That's two points in VAT's favor.

    Compared to a sales tax, a VAT avoids cascading taxes because it taxes only the additional value added, not the total sales price.

    A disadvantage of the VAT is that businesses bear the administrative burden of collecting it. I'll take that over the IRS any day!

    Mitchell's statement that it's a "European tax" is ad hominem. We should judge the tax on its qualities, not on where it is used and how it has been abused.

    He is correct that the VAT has been raised in Europe (shown in the Heritage paper), but income taxes can be raised too.

    What Mitchell fails to say is that Europe has mostly parliamentary democracies where it is much easier to make sweeping changes to law when new governments come to power. It would be much easier to stop a hike in the VAT in the US.

    More to the point, it would be much easier to stop a hike of the VAT in the US than it would be to amend our existing outrageous tax code. Again, the VAT wins - and that's using Mitchell's "Europe" jibe.

    The case that we could end up with both a VAT and an income tax again turns on our political system. I don't think those circumstances would pass through our Senate. If we had a House, Senate, and President who would impose a VAT and income tax, then we would be in no less danger than if we had an income tax alone.

    Pelosi, Reid, and Obama held a filibuster-proof majority in government, and we STOPPED them from repealing the Bush tax cuts. In fact, we got them to reduce the payroll tax. Mitchell seriously thinks we will get both a high VAT and a high income tax? I don't think so.

    The biggest problem with the VAT is that it would crowd states out of sales taxes. That would increase state income taxes and property taxes. It's the most valid criticism I know.

    Bottom line: The VAT has numerous advantages over an income tax that libertarians should love: less government involvement, less personal administrative burden, less avoidance, less social engineering.

    The structure of US government is very different than Europe, so any weaknesses in the VAT observed in Europe won't necessarily arise here. If they do arise here, they would also arise under an income tax alone under the same conditions.

    I'm not in favor of a VAT, simply because I favor a proportional income tax with many fewer deductions and exemptions. A lot of the criticism of VATs, though, are misplaced.

    I lived in Germany where there was a VAT. It was no big deal. The "hidden tax" criticism is nonsense. If you know the VAT tax rate, you can do the math. Indeed, firms in the US advertise at their PRE-sales tax prices, so that is misleading. With a VAT, what you see is what you pay.


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