Will Republicans Hand the Left a VAT Victory?

January 6, 2012

Most Republican supporters are drawn to the value added tax (VAT) because of its function according to theory.  It is a single-rate system, like the flat tax, for raising revenue, so it does not raise the possibility of class-warfare demagoguery.  The VAT also doesn't hit savings and investment.  And there are no distorting and corrupt loopholes.  So there's a lot to like about the levy, so long as it acts as a substitute rather than a complement to current tax schemes.  However, much of the advertised benefits are unlikely to be realized, as the implementation of the VAT brings many complications, says Daniel J. Mitchell, a senior fellow at the Cato Institute.

  • Unless the VAT is implemented at a significant level far beyond current discussions, it could not replace a current revenue source and would therefore act as an additional source instead of a substitute.
  • The addition of a new revenue source, whose true costs are largely hidden from taxpayers, would act merely as a tool for the creation of a bigger, more pervasive federal government.
  • Contrary to claims from the business world, a VAT would do little to help domestic business compete internationally, nor would it help significantly to balance the trade deficit.

Because the VAT will not take other taxes off the table such as the income tax or the capital gains tax, it will likely be used to justify larger government budgets.  Many argue this point by suggesting that a VAT is preferable to higher marginal rates on individual income taxes because of the benefits mentioned above.  However, this fails to take into account that increases on marginal rates have a limited effective range, that they can only be increased so far until avoidance becomes a real problem, and that the income tax in its modern framework simply cannot raise adequate funds to broaden the government's power.

Other advocates of the VAT suggest that because it would apply to imports but not to exports, the VAT would stimulate exporting sectors within the economy.  This argument does not take into account the fact that almost all of the United States' trading partners already have a VAT, and that a complex system of corporate reimbursement erases the tax's impact on trade.  In short, the VAT will bring no such stimulus to exports.

Source: Daniel J. Mitchell, "Will Republicans Hand the Left a VAT Victory?" Wall Street Journal, January 4, 2012.

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