NCPA - National Center for Policy Analysis


April 22, 2010

The VAT, or value-added tax, has become the designated panacea for massive federal budget deficits.  The implicit, though often unstated, message is that a VAT could raise so much money it could eliminate future deficits by itself.  This reasoning, if embraced, would create staggering tax burdens and exempt us from a debate we desperately need, says Robert J. Samuelson. 

How big a government do we want -- and what can we afford?  In closing deficits, what is the best mix between tax increases and spending cuts?  What programs are outmoded, ineffective or unneeded?  How much should we tax the young and middle-aged to support the elderly?  Should wealthier retirees receive skimpier benefits?  Should eligibility ages for benefits be raised? 

A VAT could not painlessly fill this void, says Samuelson: 

  • Applied to all consumption spending -- about 70 percent of gross domestic product (GDP) -- the required VAT rate would equal about 8 percent.
  • However, the actual increase might be closer to 16 percent because there would be huge pressures to exempt groceries, rent and housing, health care, education and charitable groups. 

 As for a VAT's claimed benefits (simplicity, promotion of investment), these depend mainly on a VAT replacing the present complex income tax that discriminates against investment.   Europe's widespread VATs are not models of simplicity, says Samuelson: 

  • Among the European Union's 27 members, the basic rate varies from 15 percent (Cyprus, Luxembourg) to 25 percent (Denmark, Hungary and Sweden).
  • In Ireland, food is taxed at three rates (zero, 4.8 percent and 13.5 percent).
  • In the Netherlands, hotels are taxed at 6 percent.  

A VAT will not reduce deficits painlessly; deficit reduction cannot be painless.  We will need both spending cuts and tax increases.   A VAT might be the least bad tax, but what is wrong with the simplistic VAT advocacy is that it deemphasizes spending cuts, says Samuelson. 

Source: Robert J. Samuelson, "The VAT isn't an easy fix for budget woes," Washington Post, April 19, 2010. 

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