Yesterday, the Wall Street Journal reported that talk of a adopting a VAT is becoming “more commonplace and is likely to intensify.”
In a study published on June 22, Florida State University economist Randall Holcombe strongly criticizes the VAT as inappropriate for the U.S. He says it would slow growth so much that lower revenues from other taxes would offset almost all of the revenue gain from the VAT.
Writing in the Los Angeles Times on May 24, Leo Hindery and Michael Lind of the New America Foundation argued the case for a value-added tax as part of a grand bargain between progressives and pro-business conservatives that would lower payroll and corporate taxes. They cite an April 7 study by economists Joseph Rosenberg and Eric Toder of the Tax Policy Center in support of their argument.
On May 13, Citizens for Tax Justice criticized Bill Clinton’s endorsement of a VAT as a means of improving the trade balance.
In a May 2 column, Harvard economist Greg Mankiw noted that the flat tax, which is endorsed by almost all conservatives, is essentially a VAT.
On May 1 the European Union released a report on VAT rates and exemptions in the EU.
In an April 25 post, University of Chicago economist Gary Becker acknowledged the virtues of a VAT and said he would support one if we were starting from scratch, but expressed deep concern over adding it to the current tax system as an add-on tax. He fears that it would raise spending and thereby reduce growth. Becker does not consider the possibility that a VAT would be used primarily to reduce deficits.
Also on April 25, Judge Richard Posner commented that the alternative to a VAT would be a devaluation of the currency, higher inflation and interest rates. These might have worse economic effects than a VAT, he said.
In an April 21 commentary, University of Chicago economist Casey Mulligan threw cold water on the common conservative criticism that spending would grow because a VAT is “invisible” (i.e., largely embedded in the prices of goods). He points to data showing that spending is no lower in countries with more visible taxes.
On April 14, Brookings Institution economists Henry Aaron and Isabel Sawhill published a commentary arguing in favor of a VAT on the grounds that the deficit is simply too large to be dealt with solely through spending cuts and that higher revenues will need to be considered.
In a February 17 post, George Mason University economist Tyler Cowen said there is a “credible bipartisan deal” that involves imposing a VAT, using half the revenue for deficit reduction and the rest for tax reform. He responded to conservative critics in a February 19 post, noting that New Zealand’s adoption of a VAT did not lead to an expansion of government, as conservatives universally believed would happen.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily and writes a weekly column at The Fiscal Times. Read his most recent column here. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).
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July 12: Focus on Stimulus
July 9: Weekly Roundup
July 8: Focus on State and Local Governments
July 7: Focus on Africa
