VAT Lessons from Europe

In today's (Thursday, April 15) "Opinion Page" of the Wall Street Journal is an excellent that explains the European experience with the "Value Added Tax (VAT)."

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 approximately 17.2%. (See the following table.) In the U.S., the VAT would undoubtedly be levied on top of federal, state and local sales taxes that range as high as 10%.

Selective excerpts of the article are as follows:

"One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%."

"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%."

"Proponents also argue that a VAT would result in less federal government borrowing. But that, too, has rarely been true in Europe."

"The very efficiency of the VAT means that it throws off huge amounts of revenue that politicians eagerly spend. The VAT thus becomes an engine of even greater public spending. In Europe, average government spending was about 30.2% of GDP when VATs began to spread in the late 1960s. Today, those governments are more than 50% larger, with spending of 47.1% of GDP on average. By contrast, U.S. government spending (federal and state) rose to 35.3% from 28.3% as a share of GDP in the same period."

"It is precisely this revenue-generating ability that makes the VAT so appealing to politicians. Even liberals understand that at some point high income tax rates stop yielding much more revenue as the rich change their behavior or exploit loopholes. The middle-class is where the real money is, and the only way to get more of it with the least political pain is through a broad-based consumption tax such as a VAT."

"In Europe, VAT has also meant lower levels of income growth and job creation. From 1982 to 2007, the U.S. created 45 million new jobs, compared to fewer than 10 million in Europe."

I believe the above facts speak for themselves. Once again, you have been forewarned.