VALUE-ADDED TAXES MEAN BIG GOVERNMENT

The evidence from Europe shows that consumption taxes go hand-in-hand with rising income taxes...

There is growing interest in Washington in a new national consumption tax, otherwise known as a value-added tax or VAT, says Daniel J. Mitchell, a senior fellow at the Cato Institute.

The classical argument in favor of a VAT says that it's desirable because it has a single rate and is based on consumption. It is true that single-rate systems (assuming a reasonable rate) are less harmful than discriminatory regimes with "progressive" rates. It's also true that a consumption-based tax would not inflict as much damage as our internal revenue code, with its multiple layers of tax on income that is saved and invested. But these arguments only apply if a VAT replaces the current tax system -- which is not the case here. And the evidence from Europe suggests it's not a good idea to add a somewhat-bad tax like the VAT on top of a really bad tax system.

VATs are associated with both higher overall tax burdens and more government spending, says Mitchell:

• In 1965, before the VAT swept across Europe, the average tax burden for advanced European economies (the EU-15) was 27.7 percent of economic output, roughly comparable to the United States, where taxes were 24.7 percent of gross domestic product (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 percent.

Results?

• By 2006, the OECD reports that the average tax burden for EU-15 nations had climbed to 39.8 percent of GDP.
• The tax burden also has increased in the United States, but at a much slower rate, rising to 28 percent 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 percent of GDP, not much higher than the 28.3 percent of economic output consumed by U.S. government spending.
• According to 2007 data, government spending now consumes 47.1 percent of GDP in the EU-15, significantly higher than the 35.3 percent burden of government in the United States.

Source: Daniel J. Mitchell, "VATs Mean Big Government," Wall Street Journal, June 4, 2009.

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