Daniel J. Mitchell
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I’ve written before how “The Value-Added Tax Would Be a Money Machine for Big Government.”

Writing for Bloomberg, Josh Barro has a piece entitled, “Value-Added Tax Would Raise Tons for U.S. Coffers.”

So you might think we see eye to eye on this issue, but that would be a rash assumption. While I see a giant new tax as a dangerous step on the road to serfdom, Josh thinks it’s a necessary and desirable reform.

…it is time to reconsider a VAT. It would be both substantively better and more politically palatable. Here’s why: A value-added tax raises a ton of money. The base (the total amount of goods that would be subject to tax) would range from one-third to one-half of gross domestic product. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of GDP. A 10 percent VAT with a relatively broad base could raise $750 billion a year, enough to pay for about a fifth of the federal budget.

This is the point where I could make a snarky comment about how I want to cut “a fifth of the federal budget, ” not figure out how to pay for it, but that would take away from much more important concerns.

What really worries me about a VAT is that it will enable politicians to increase the burden of government spending. And that’s not good for the economy, regardless of whether that new spending is financed by the VAT, by income taxes, by borrowing, or by energy taxes. Heck, even if the spending is financed by little green men from outer space, more government spending will undermine prosperity by causing resources to be allocated to less productive uses.

I also think Josh is a bit naive in thinking that a VAT will enable reductions to other taxes. The European experience suggests that VATs are associated with higher tax burdens of income and profits (in part because VAT increases are matched with class-warfare tax hikes to make sure “the rich” pay their fair share).

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Daniel J. Mitchell

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.