Understanding Just How Dangerous a Value-Added Tax Is

By Murray N. Rothbard

This originally appeared in Human Events, March 11, 1972.

One of the great and striking facts of recent months is the growing resistance to further taxes on the part of the long-suffering American public. Every individual, business, or organization in American society acquires its revenue by the peaceful and voluntary sale of productive goods and services to the consumer, or by voluntary donations from people who wish to further whatever the group or organization is doing. Only government acquires its income by the coercive imposition of taxes. The welcome new element is the growing resistance to further tax exactions by the American people.

In its endless quest for more and better booty, the government has contrived to tax everything it can find, and in countless ways. Its motto can almost be said to be, "If it moves, tax it!"

Every income, every activity, every piece of property, every person in the land is subject to a battery of tax extortions, direct and indirect, visible and invisible. There is of course nothing new about this; what is new is that the accelerating drive of the government to tax has begun to run into determined resistance on the part of the American citizenry.

It is no secret that the income tax, the favorite of government for its ability to reach in and openly extract funds from everyone's income, has reached its political limit in this country. The poor and the middle class are now taxed so heavily that the federal government, in particular, dares not try to extort even more ruinous levies.

The outraged taxpayer, after all, can easily become the outraged voter. How outraged the voters can be was brought home to the politicians last November, when locality after locality throughout the country rose in wrath to vote down proposed bond issues, even for the long-sacrosanct purpose of expanding public schools.

Defeat in New York

The most heartening example – and one that can only give us all hope for a free America – was in New York City, where every leading politician of both parties, aided and abetted by a heavily financed and demagogic TV campaign, urged the voters to support a transportation bond issue. Yet the bond issue was overwhelmingly defeated – and this lesson for all of our politicians was a sharp and salutary one.

Finally, the property tax, the mainstay of local government as the income tax is at the federal level, is now generally acknowledged to have a devastating effect on the nation's housing. The property tax discourages improvements and investments in housing, has driven countless Americans out of their homes, and has led to spiraling tax abandonments in, for example, New York City, with a resulting deterioration of blighted slum housing.

Government, in short, has reached its tax limit; the people were finally saying an emphatic "No!" to any further rise in their tax burden. What was ever-encroaching government going to do? The nation's economists, most of whom are ever eager to serve as technicians for the expansion of state power, were at hand with an answer, a new rabbit out of the hat to save the day for Big Government.

They pointed out that the income tax and property tax were too evident, too visible, and that so are the generally hated sales tax and excise taxes on specific commodities. But how about a tax that remains totally hidden, that the consumer or average American cannot identify and pinpoint as the object of his wrath? It was this deliciously hidden quality that brought forth the rapt attention of the Nixon administration, the "Value Added Tax" (VAT).

The great individualist Frank Chodorov, once an editor of Human Events, explained clearly the hankering of government for hidden taxation:

It is not the size of the yield, nor the certainty of collection, which gives indirect taxation [read: VAT] preeminence in the state's scheme of appropriation. Its most commendable quality is that of being surreptitious. It is taking, so to speak, while the victim is not looking.

The VAT is essentially a national sales tax, levied in proportion to the goods and services produced and sold. But its delightful concealment comes from the fact that the VAT is levied at each step of the way in the production process: on farmer, manufacturer, jobber and wholesaler, and only slightly on the retailer.

The difference is that when a consumer pays a 7 percent sales tax on every purchase, his indignation rises and he points the finger of resentment at the politicians in charge of government; but if the 7 percent tax is hidden and paid by every firm rather than just at retail, the inevitably higher prices will be charged, not to the government where it belongs, but to grasping businessmen and avaricious trade unions.

While consumers, businessmen, and unions all blame each other for inflation like Kilkenny cats, Papa government is able to preserve its lofty moral purity, and to join in denouncing all of these groups for "causing inflation."

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public – to bring about higher prices, lower production, and lower incomes – and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

The VAT is, in short, a looming gigantic swindle upon the American public, and it is therefore vitally important that it not pass. For if it does, the encroaching menace of Big Government will get another, and prolonged, lease on life.

Read the rest here.

Why the Valued Added Tax Is Coming On Top of the Income Tax

By Uwe E. Reinhardt 


There are plenty of reasons to shudder at the idea of higher taxes. There are also plenty of reasons to expect them nonetheless.

It is understandable that everyone dislikes paying taxes, because they are a forced personal outlay for things one does not necessarily appreciate.

Economists, for their part, teach their students that in addition to this understandable opposition to taxes, taxes also tend to change economic behavior, mainly in undesirable directions.

A tax on wages and salaries, for example, lowers the net reward to supplying hours of work to the economy. Sometimes, to be cute, economics professors style that tax as a “subsidy for consuming leisure,” just to drive home the point.


With few exceptions all other taxes have some effect on economic behavior as well. The main exceptions are (1) a so-called per capita head tax, which almost never prompts people to cut off their heads to avoid the tax, and (2) a tax on unimproved land, because that land simply is there. The improvements human make on land, however, can be affected by taxation.

Occasionally a tax can help curb behavior society may wish to curtail. A sales tax on tobacco, for example, is known to reduce smoking, especially among teenagers. A tax on the output from polluting production can induce firms to clean up their production processes, thus curbing pollution, or simply to reduce production. Taxes designed to curtail undesirable behavior are known in the vernacular as “sin taxes.”

But for the most part, taxes tend to curtail some desirable economic behavior, be it working or investing in productive capital, or trading for mutual advantage. Taxes then entail what economists call a “deadweight loss.”

By “deadweight loss” economists have in mind the fact that when a tax reduces desirable economic behavior — e.g., the building of boats, or producing some other valued output — the value of the output to society thus lost usually exceeds the value of the resources that are no longer sacrificed to produce that lost output.

The difference between the two is considered by economists to be an overall loss of human welfare.  Depending on how sensitive the economic activity in question is to taxation, that deadweight loss can be non-trivial. Furthermore, that deadweight loss is thought to increase more than proportionately with tax rates.

So why then do we have taxes at all, given that they entail this undesirable “deadweight loss”?
The answer is that in their infinite wisdom, voters in a democracy demand that government spend money on them, and their elected representatives in Congress oblige. That spending must be financed.
In principle, government spending program should be financed with taxes. The exception would be spending by government on long-lived investment projects — for example, roads, airports, research and development, schools — that should be financed with long-term public debt, which in turn will then be paid off in good part by future taxpayers who also benefit from using the long-lived public asset.

A government’s current operations and transfer payments, however, should be fully tax-financed, at least over the business cycle. The most policy makers can do is to select the combination of taxes that minimizes the nation’s overall “deadweight loss” from taxation, albeit with due regard to what is considered “fair” at the moment.

It so happens that in recent history American voters have wanted the federal government to spend more on them than they are willing to finance with taxes. One can see this clearly by examining the famous state-by-state spending-to-tax ratios published regularly by the Tax Foundation.

The graph below illustrates this penchant as well, at a more aggregate national level. The data in that graph exclude the operations of the Social Security and Medicare Trust Funds. The data are routinely published in the annual editions of the Economic Report of the President.

There is now widespread agreement that at some point the federal government must stop piling on the federal debt. On the campaign stump, political candidates all agree.

But would a politician dare openly to advocate cutting specific programs – for example, agricultural subsidies for the rural states whose voters have disproportionate voting power, or cuts in military spending that would kill jobs in particular states, or spending on Medicare, which in many parts of the country has been a major source of employment?

Now, if it is politically impossible to cut spending — as it has been so far — then taxes will have to be raised sooner or later.

So, my friends, get ready for the inevitable: Before this decade is out, whether you like it or not, the United States will have a value-added tax, just as they have long had in most of the world. The VAT will not be a substitute for the income tax (which, ideally, I wish it would be), but a complement to it, to supplement what can be had through income taxes.

Read the rest here.

Volcker’s VAT Plan Is Nuts, Absolutely Nuts

by Larry Kudlow

As I’ve said many times over the past year or so, there are major storm clouds looming on the horizon for our fragile, yet recovering, U.S. economy. The latest ominous cloud comes by way of former Federal Reserve chairman Paul Volcker, who is pushing President Obama to adopt a value-added tax, or VAT.


Now, I have the utmost respect for Paul Volcker.


He was my boss 35 years ago when I worked at the New York Fed. And it was Volcker, of course, who conquered the inflation that took root in the 1970s.

He may very well be the greatest central banker of all time.

But with all due respect, Volcker’s call this week for a European-style VAT (as well as a carbon tax) is itself a historic mistake.

The last thing we need right now is more tax hikes. There are a dozen new tax hikes already squirreled away inside President Obama’s health-care law. Medicare payroll taxes are going to be imposed on capital gains and dividends. Investor taxes are going way up when the Bush tax cuts expire at the end of this year. And to top it all off, half the states in the country are raising taxes.

Look, if you think for a one moment that spendthrift politicians in Washington won’t treat higher tax revenues as their very own honey pot, think again.

That’s exactly what this crowd will do.

Read the rest here.

Mankiw: VAT Is Really Bad, But, Hey, I'm All for It

In today's NYT, Greg Mankiw does his very best to, as always, be on both sides of all issues. He does note that President Obama's spending is out of control, and reminds us that a VAT may be coming:

Nancy Pelosi, the House speaker, gave a hint in an interview last October when she said a value-added tax was “on the table.”

He then explains how bad VAT is, distorting the economy on many levels:

A value-added tax is like a sales tax, but rather than being collected entirely at the retail store, it is collected in stages along the chain of production. Many European countries use it, and it is one of the more efficient ways to raise revenue. So efficient, in fact, that some conservatives fear that it would too easily fuel the growth of government.

YET despite its efficiency compared with other taxes, a VAT does not offer a free lunch. It would raise consumer prices, lower real wages, discourage work and depress economic growth. It would also break President Obama’s pledge not to raises taxes on the middle class.

But after warning about all the dire consequences of a VAT, he ends up endorsing it:

But unless the president revises his spending plans substantially, he will have no choice but to find some major source of government revenue. Ms. Pelosi’s suggestion of a VAT may be the best of a bunch of bad alternatives.

Doesn't this guy even have the balls to stand up against a VAT at this early theoretical stage? It's clear he knows VAT is bad. It's clear he knows government spending is out of control. It is absolutely remarkable how easy these guys bend to the way government winds blow.

Did Ayn Rand nail this guy, or what?:

They have no concern for facts, ideas, work. They’re concerned only with people. They don’t ask: “Is this true?” They ask: “Is this what others think is true?” Not to judge, but to repeat. Not to do, but to give the impression of doing. Not creation, but show. Not ability, but friendship. Not merit, but pull.

Pelosi: VAT Is On the Table

A new value-added tax is "on the table" to help the U.S. address its fiscal liabilities, according to House Speaker Nancy Pelosi.

Pelosi, appeared Monday on PBS's "The Charlie Rose Show" and said that "it's fair to look at" the VAT as part of an "overhaul" of the nation's tax code.

"I would say, Put everything on the table and subject it to the scrutiny that it deserves," Pelosi told Rose when asked if the VAT has any appeal to her.

Overhaul is, of course, code for tax increases.