With tax reform on the agenda in Washington, or at least in the White House, this is the season for proposals. One proposal on the table for consideration is the value-added tax. A VAT, which is used heavily in overtaxed Europe, is a tax levied on goods and services at each level of production.
There are some limited-government economists who can support a VAT tax because it is a very efficient way to raise funds. However, the VAT also comes with some baggage. For example, one principle of sound taxation is transparency. Americans need to know how much they’re paying in taxes. But the VAT is the murkiest of all taxes – which is why lawmakers like it.
Lawmakers can easily hike value-added taxes with little public notice because the taxpayer doesn’t see all those duties that are slapped on a good as it makes its way from raw material to consumer. The consumer simply sees the final cost at the register, not the taxes that were loaded into the price.
Consider that in 1970, taxes were 30 percent of the European economy. Thirty years later, that share exploded to 42 percent, while the U.S. burden has remained virtually constant at roughly 27 percent.
It’s no coincidence, then, that the VAT, invented in France in the 1950s and first adopted by Denmark in 1967, allowed European officials to continually increase the size of governments — putting a drag on Europe’s economy.
Another danger of a VAT is that some of its proponents see it as an additional tax rather than a replacement for the current system of income and corporate taxes. But why introduce more layers when simplification is one of – or should be one of – the objectives of tax reform?
Americans deserve a new tax system. But it needs to be a fair, low, broad-based, simple and transparent tax system. Unless a VAT can be crafted to meet those criteria, we shouldn’t let the VAT out of the bag.