NCPA - National Center for Policy Analysis

If VAT Is RX For Deficits and Debt, Why Are VAT Users on the Brink?

September 1, 2010

Drums are beating in Washington for a value-added tax (VAT) in addition to the "stimulus" taxes, health care taxes, energy taxes and other taxes President Obama has imposed and wants to impose on hard-pressed taxpayers. 

Supposedly a value-added tax is a magic elixir for curing budget deficits and excessive debt.  Quack remedy would be more like it.  If it worked, you'd observe that countries with a VAT had budget surpluses and no debt problems.  But almost every country that has a VAT is plagued with budget deficits and excessive debt.

  • The most notable exception is Norway whose government has net assets larger than its gross domestic product (GDP), thanks to large oil revenues and a small population.
  • By contrast, the U.S. GDP is dwarfed by trillions of dollars of the government's unfunded liabilities. In the event Washington introduced a VAT, the government would spend all the revenue and then some, as has happened so many times before, resulting in excessive debt and a larger tax burden.

The Organization for Economic Cooperation and Development (OECD) reported that since the 1960s, when the VAT began to be widely adopted, government spending by OECD member countries with a VAT soared from 30 percent of their GDP to 50 percent.  Furthermore:

  • Iceland has the highest VAT rates, but this didn't prevent its financial crisis and the near bankruptcy of its government.
  • Italy's VAT rates are almost as high, and its debt exceeds its GDP.
  • Financial crises are looming in Spain and Portugal, and of course they have a VAT.

Governments tend to spend all available revenue, and then some.

Greece has a VAT, too, and when politicians ran out of money to pay government employees for more than a year's worth of work every year, they rioted in the streets.  Great Britain has a VAT, and its government finances are in the worst shape since World War II -- its budget deficit is expected to be bigger than that of Greece.

Moreover, the OECD has acknowledged that "(VAT) tax and transfer wedges have discouraged firms from offering employment and individuals from taking it, reduced employment and increased inequality."

Source:  Jim Powell, "If VAT is RX for Deficits and Debt, Why are VAT Users on the Brink?" Investors Business Daily, August 31, 2010.

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