The VAT reconsidered

Many people have fought introduction of a value-added tax (VAT) in the United States on the grounds that it would be a "money machine" that would fuel the growth of government, says Bruce Bartlett, a senior fellow with the National Centre for Policy Analysis.

While there is no question that most countries with VAT’s are high-tax countries, the fact is that almost all were high-tax countries before they adopted the VAT. And while it is true that most countries have raised their VAT rates over time, it is important to distinguish among them. In general, countries where the money machine argument is most valid are those that instituted a VAT before the great inflation of the 1970s, which disguised VAT increases from public view.

Furthermore, not all countries introducing VAT’s have seen their overall tax burden rise, says Bartlett:

Taxes as a share of the gross domestic product have fallen from 29.8 percent in Japan the year its VAT was introduced to a current level of 25.8 percent.

In Canada, the ratio of taxes to gross domestic product fell from 36.4 percent to 33.9 percent.

Other countries where the ratio has fallen since the VAT was introduced include Australia, the Czech Republic, Finland, Ireland and Poland.

The VAT may or may not be a good idea for the United States. But it should not be casually dismissed as a money machine without serious analysis of the trade-offs. It may turn out to be the least bad way of financing needed tax reforms and the massive growth of federal health care spending that neither the White House nor Congress shows any interest in restraining, says Bartlett.

Source: Bruce Bartlett, The VAT Reconsidered, National Centre for Policy Analysis, March 9, 2005.

For text: http://www.ncpa.org/edo/bb/2005/20050309bb.htm

For more on Value Added Tax: http://www.ncpa.org/iss/tax/

FMF Policy Bulletin/ 29 March 2005