EUROPE'S VAT LESSONS: RATES START LOW AND INCREASE, WHILE INCOME TAX RATES STAY HIGH

April 15, 2010

As Americans rush to complete their annual tax returns today, there is still some consolation in knowing that it could be worse: Like Europeans, we could pay both income taxes and a value-added tax, or VAT. And maybe we soon will. Paul Volcker, Nancy Pelosi, John Podesta and other allies of the Obama Administration have already floated the idea of an American VAT, so how has it worked in Europe, asks the Wall Street Journal? 

  • A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register.
  • In Europe the average rate is a little under 20 percent.
  • In the United States, a federal VAT would presumably be levied on top of state and local sales taxes that range as high as 10 percent.
  • Some nations also exempt food, medicine and certain other goods from the tax.  

VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment, says the Journal: 

  • This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate.
  • The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46 percent.
  • In the United States, VAT proponents aren't calling for a repeal of the 16th Amendment that allowed the income tax -- and, in fact, they want income tax rates to rise. 

One trait of European VATs is that while their rates often start low, they rarely stay that way, says the Journal: 

  • Of the 10 major Organization for Economic Co-operation and Development (OECD) nations with VATs or national sales taxes, only Canada has lowered its rate.
  • Denmark has gone to 25 percent from 9 percent, Germany to 19 percent from 10 percent, and Italy to 20 percent from 12 percent.
  • The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18 percent. 

Source: Editorial, "Europe's VAT Lessons: Rates start low and increase, while income tax rates stay high," Wall Street Journal, April 15, 2010. 

For text:

http://online.wsj.com/article/SB10001424052702304198004575172190620528592.html 

 

Browse more articles on Tax and Spending Issues