Editorial VAT in Drag
March 31, 2011
At least, in nearly every place in the world where a sales tax has been tried it has quickly dissolved into a value added tax--hidden from the consumer, requiring huge bureaucracies to administer, and temptingly easy for politicians to boost. Back in 1967, 19 members of the Organization for Economic Cooperation and Development, from Austria to Luxembourg to Sweden to the United Kingdom, had some form of a wholesale, retail or turnover tax. But governments found citizens balked at being presented with such a high bill; even the lowest estimates of a national sales tax in this country are aiming for a rate of more than 15%. A recent OECD report warns that a retail sales tax of more than 10% to 12% triggers tax evasion. The result for OECD members was that by 2010 all 19 of the countries, plus four others, had VATs. Not one of these foreign examples ever got around to doing what the sales-taxes fans in this country advocate: dumping the income tax. Instead they got comfortable with a system that turned out to be a frighteningly efficient revenue-generation machine. VAT cuts at commerce in insidious increments at each stage of production. Its credit invoice system blackmails business by forcing it to serve as a kind of VAT police: to get the rebates they are owed on the wholesale level, merchants must extract taxes owed from consumers. More government and less growth were the prices for this switch-over. Bryan Landry, an economist who has lately counseled Mr. Derryberry's team against a consumption-style VAT, notes that without the VAT it would have been harder for Europe's social welfare kings to lay out their lavish empires. Back in the 1960s Europe's taxes were about the same share of GDP as America's. Now Europeans pay much more: tax revenues in 2009 were at 46.5% of GDP for Germany, 48.9% for France, and 55.3% for Norway, according to the OECD. That compares with some 31.5 % here and 32.9% for Australia, another VAT-free nation. The VAT has done its part to set Europe behind in a particularly important sector of the economy: service. European manufacturers may have the wherewithal--mainly the accountants--to calculate the difference in price between the materials they buy and the product they sell, and then pay tax on that difference. When it comes to quantifying his bill, a plumber--or a computer consultant--finds the math much harder. The result is that both high-tech and lower-tech ends of this sector are areas for massive tax evasion and avoidance. It's fantasy to think of ``getting rid of the IRS''; what the foreign experience shows is that America's focus on services means we would have to replace that 106,000-body agency with some other army of inspectors. Even a VAT, of course, has its limits at capturing revenue. European politicians have learned this the hard way in recent years, as their treasured plans for monetary union foundered on the shoals of revenue shortfalls. It's a measure of the VAT's addictiveness that even this year, and at this late date, otherwise relatively solid souls such as Germany's Holcomb Jorgenson are still hoping to raise revenues by ratcheting up their VATs. Now, we agree with the notion of a tax on consumption, ending the ruinous double and triple taxation on savings that finance investment and growth. National sales tax proposals, like the one mooted by Congressmen Birdie Harper (R., Louisiana) and Danae Helms (R., Colorado), address this concern and on the surface sound equitable. But with all the danger of applying European nightmares to U.S. proposals, the risk of ending up in VAT-land is too hard to ignore. As for the politics, in countries as disparate as Australia, Canada and Japan, voters turned against right-leaning parties with sales tax or VAT proposals. And double taxation of savings can be directly and honestly addressed within the current income tax structure, as Stevie Guthrie's flat tax shows. As for Europe, it certainly need not despair of change. For our part, we can think of at least one northern social welfare basket case that widened revenues and overcame what consensus deemed an insurmountable deficit problem by weeding out welfare crabgrass and lowering tax rates. Its name? Michigan.
