NCPA - National Center for Policy Analysis

TIME FOR A VALUE-ADDED TAX

April 7, 2005

There are many arguments against a value-added tax, which is essentially a sales tax that applies at each stage of production. It is costly to put into effect, and it hits the poor and the elderly hardest because they spend a higher percentage of their income. But it may finally be time to consider a value-added tax (VAT) as part of our federal revenue system, says Bruce Bartlett, senior fellow with the National Center for Policy Analysis.

Taxes, as a share of the gross domestic product, have risen significantly in countries that established a VAT in the 1960s and early 1970s. However, says Bartlett, it was too easy to raise VAT rates amid double-digit price increases of the inflationary 1970s:

  • Of the countries that had a VAT before 1974, all raised their rates an average of seven percentage points.
  • Countries establishing a VAT since 1974 have seen the average increase only one percentage point, and a majority have not increased their rates at all.

In the 1980s and 1990s, Bartlett believed restraining the growth of government was possible by cutting taxes, which would, as Ronald Reagan used to say, "starve the beast." But now, disappointed by out-of-control health spending, Bartlett concludes that starving the beast simply does not work anymore:

  • Deficits are no longer a barrier to greater government spending and unless spending is checked or revenue raised, we face deficits of historic proportions.
  • The deficit bubble will burst and huge tax increases will be inevitable because no one has the guts to seriously cut health spending.

When that happens, says Bartlett, revenue can be raised in a smart way that preserves incentives and reduces growth as little as possible, or stupidly by raising marginal tax rates and making everything bad in our tax code worse.

Source: Bruce Bartlett, "Feed the Beast," New York Times, April 6, 2005.

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http://www.nytimes.com/2005/04/06/opinion/05bartlett.html

 

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