Friday, August 26, 2011

To VAT, or not to VAT?

Wednesday's Wall Street Journal (cited in link below) had an excellent op-ed on the consequences of an imposition of a value-added, or "VAT" tax. The thesis of the piece was that a VAT would be a huge job-killer, that would slow economic growth. All that may be, but I what I found most interesting was the startling numbers around how much money it would actually raise. For example, each percentage increase in VAT raises close to $100 billion. In other words, a 15% VAT, assuming all things are equal, would erase the current budget deficit. The fact that it might also erase the prospects for any future economic growth is another story. What is interesting to me, is how compelling and tempting this must seem to some politicians in Washington. The logic would go like this: In Europe VAT rates range from 15% to 25% already (the U.K. now has a 20% VAT and France's is almost that percentage). What makes the U.S. think it is so different? By the way, I do not agree or accept this line of thinking at all (it's a subset of the shoddy thinking that arises out of the premise that, "well, if the 'other guy' is doing it, it must be ok"). That said, I recognize its allure and superficial appeal. As such, I think if budget problems persist (a reasonable likelihood), expect the debate around the introduction of the VAT (or its cousin, a national consumption tax) to gain greater traction.


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