NCPA - National Center for Policy Analysis


April 8, 2010

How will the Obama administration pay for its new health care reform?  Through a Value Added Tax (VAT), which is a fancy way of saying national sales tax, says Conn Carroll, Assistant Director of Strategic Communications for the Heritage Foundation. 

A VAT can be (and has been) structured in many different ways.  But the real world results are always the same, says Carroll: higher taxes, more government spending, lower growth, fewer jobs and more special interest power. 

Higher taxes: 

  • Don't believe for a second that a VAT will help offset other taxes; international evidence clearly shows that a VAT is likely to increase the aggregate burden of government.
  • Europeans used to only have a slightly higher tax burden than the United States, but beginning in the late 1960s, European countries began to implement VATs; since then, the overall tax burden in Europe has climbed rapidly, and once a VAT is in place, the evidence shows that the tax rate rises over time. 

Higher government spending: 

  • Not surprisingly, with more revenues, European governments turn around and spend much more than the United States does.
  • According to a study by the U.S. Chamber of Commerce, government spending grew 45 percent faster in VAT nations than in non-VAT countries. 

Slower growth: 

  • According to the academic literature, there is a strong negative relationship between government spending and economic performance; in other words, more government spending means less economic growth and fewer jobs.
  • Economic growth is driven by individuals and entrepreneurs operating in free markets, not by Washington spending and regulations. 

More power to Washington: 

  • There is one economy that would greatly benefit from a VAT: Washington, D.C., because no VAT could ever be levied evenly on all goods and services.
  • Due to political considerations, a VAT in addition to current taxes would likely exempt politically sensitive items like food, clothing, health care and housing.
  • Industries would lobby heavily for exemptions from the VAT for the economic benefits described above. This would give Congress an even larger role in picking winners and losers in the marketplace.
  • Success would depend less on ingenuity and hard work and more on the ability to gain political favor. 

Source: Conn Carroll, "How the Left Really Plans to Pay for Obamacare," Heritage Foundation, April 7th, 2010. 

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