Monday, November 16, 2015

Hostility to the Value Added Tax is Justified

It is horrific. Please take note Rand Paul and Tez Cruz.

I consider it impossible to vote or just support either of these candidates based on their call for the evil VAT.

Daniel J. Mitchell writes:
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 American level. But as VATs were implemented, the welfare state expanded, and now government consumes a much higher share of economic output on the other side of the Atlantic. I suppose someone could argue that there was no relation between the adoption of VATs and the expansion of the welfare state, but that would be a monumental challenge for the simple reason that there’s a limit to how much revenue can be generated by an income tax...

 Indeed, income-tax revenues (personal and corporate) average less than 12 percent of GDP in OECD nations. And the small handful of countries that manage to collect substantially above that level impose very high tax rates at very low levels of income. Denmark, for instance, collects more money (as a share of GDP) from the income tax than any other nation, but not because there are dozens of billionaires paying huge amounts of money. Instead, regular workers lose 56 cents of every dollar they earn once their yearly income reaches about $62,000. Oh, and by the way, Denmark also has a 25 percent VAT, so the middle class not only pays onerous income taxes but also gets pillaged by a VAT. In other words, the only effective way to finance European-sized government is to have European-style taxation. Which is exactly why the Left desperately wants a VAT...
Here's Mitchell on what would eventually happen if a VAT is introduced in the US:
We know that will happen at some point, so consider the possible consequences. That politician (President Chelsea Clinton?) will want a big increase in the tax burden to help financing an ever-growing budget. If we had something akin to our current tax code, she would have three unpleasant options: impose class-warfare tax increases, which wouldn’t actually generate much revenue; impose much higher tax rates on lower-income and middle-income taxpayers, which would be very unpopular; or convince Congress to adopt a VAT, which also would be very unpopular. But what if the VAT already exists thanks to well-meaning but misguided Republicans? Raising the VAT rate would be a comparatively simple option for our hypothetical left-wing president. And because it has such a broad tax base (all “value added” in the economy, including wages paid to workers), even small rate increase would generate a lot of revenue to finance bigger government. 
Moreover, because the VAT is a hidden tax that is collected by businesses, the workers and consumers who would pay the additional tax typically would not realize that government was to blame as their living standards declined.


  1. They instituted a VAT tax in the Bahamas on 1/1/2015 (7.5%).
    The push back was epic. It required the installation of expensive smart terminals in every Mom and Pop business. The merchants (and everybody else) hated it. Lots of grousing. The additional tax revenue was 'supposed' to benefit all the islands, but everyone knew it would stay in Nassau. And it has.
    But here's the scary part. I did some informal polling the other day, and all the merchants shrugged and said "Well, we're used to it now, and we don't think about it."
    So, when it gets bumped to 10% (and it will), they'll bitch for a month, then adjust.
    Boiling frogs.

  2. "Moreover, because the VAT is a hidden tax that is collected by businesses, the workers and consumers who would pay the additional tax typically would not realize that government was to blame as their living standards declined."
    Right, nearly impossible to know how much, or what part of a transaction is the skim taking place; just the sort of tax loved by the state. Further, the income tax started at a fairly low level of extraction, we see where it is today. VAT's are notorious for being sold as a minor tax scheme that extract only a tiny amount, but in many instances with time they extract a significant amount from the hapless person(s).
    Of course the biggest hidden tax is the ongoing monetization of debt, and the Fed Policy objective of 2 percent inflation per annum.

  3. they won't go for a VAT, they will have a Goods and Service Tax instead far more business friendly.