A Value-Added Tax is a Bad Idea

Its reduction of deadweight loss from taxes would be less than the added deadweight loss from government spending.

By David R Henderson. Excerpt:

"The evidence is strong that a VAT makes it easier for the government to tax more. The VAT is, in short, a revenue machine for big government. All other things being equal, the higher taxes are, the lower economic growth is. Moreover, even if the higher taxes did not hurt growth, they would put more money in the hands of government, which spends more recklessly and wastefully than we spend our own money. (italics added)

Take Europe, where the VAT is a major source of government revenue. When Belgium, France, Germany, Ireland, Italy and the Netherlands adopted a VAT—all between 1968 and 1971—their stated revenue goal was neutrality: Gains in revenue from the VAT were to be fully offset by reduced taxes elsewhere. (France already had a VAT but needed to revise it to meet European Economic Community Standards.) All failed. Government revenues—and spending—rose substantially as a percentage of GDP. In 1967 in France, the year before that country adopted its EEC-compliant VAT, total government revenues were 33.4% of GDP. In 1968, France adopted a VAT rate of 13.6%. By 2014, its VAT rate was 20% and government revenues were a whopping 45.2% of GDP. When Britain adopted a VAT, the government’s stated goal was to reduce revenue. That failed too. Only one country, Denmark, adopted a VAT to increase revenues. It succeeded.

Why does a VAT make it easier for government to raise revenue? One possible reason is that a VAT is nearly invisible. When you pay for an item and don’t see the tax itemized on your receipt, you may not be aware of how big the tax is. And VATs tend to be hidden. Ironically, another possible reason VATs have led to government growth is that because VATs are more efficient at raising revenue, governments are tempted to raise VATs. Whichever explanation is correct, the sad truth is that VATs are not an engine of economic growth but, rather an engine of government growth."