VAT or Crock

Believe it or not, we found an academic who doesn’t like a tax. Usually, the total number of such tenured scholars would fill…my office.

What makes this find even more remarkable is that this particular levy is a European craze long looked upon with envy by American elites. For example, President Clinton recently gave an interview in which he waxed rhapsodic about the Value Added Tax (VAT), long a staple in most of the nations of Western Europe.

“I think they ought to look at a progressive value-added tax, just because—and I think it’s important the American people understand this—most of our competitors have tax systems like this,” the former president told CNBC recently. “If you have a value-added tax … you lower the income taxes, corporate and personal, and you put a little revenue collector on every stage of sales in a product or service, but if it is exported, you don’t pay the last price.”

As you might guess, President Clinton’s Democratic successor in the oval office is also enamored of the idea. “You know, I know that there’s been a lot of talk around town lately about the value-added tax—that is something that has worked for some countries,” President Obama said in another interview on CNBC. “It’s something that would be novel—for the United States.” Indeed it would.

“While one can debate the merits of a VAT in other countries, the tax is not a good fit for the United States,” Florida State University economist Randall G. Holcombe writes in a recent paper for the Mercatus Center at George Mason University.  “It taxes a base that has traditionally belonged to state governments, its introduction would bring with it intergenerational inequities, it has a cumbersome administrative structure that would impose large compliance and administrative costs, and it would slow economic growth.”

“Because of slower economic growth, tax revenues from existing tax bases will fall if a VAT is introduced.”

“Government’s share of GDP would rise, but because of slower GDP growth, not because of an increase in total government revenues,” Professor Holcombe notes in his research notes on the effect the tax would have on the Gross Domestic Product. “If this seems implausible, consider that U.S. GDP growth has been consistently higher than EU [European Union] GDP growth since the VAT’s introduction there.”

“In addition, U.S. government spending per capita is about the same as it is in France, and is higher than in Germany and the UK [United Kingdom], even though those countries have larger government as a share of GDP. These comparisons are not proof that the VAT causes slower economic growth, but do show that these projections are consistent with the experience of many countries that use a VAT.”

Malcolm A. Kline is the Executive Director of Accuracy in Academia.