The Spectacle Blog

Cost of Government Day: VATs and Other Bad Ideas

By on 8.12.09 | 5:48PM

Today is Cost of Government Day--the day that you stop working to pay for the total cost of government (spending plus regulation).  To state the obvious, it's August.  The latest this day ever used to come was mid-July.  In fact, the day has advanced by nearly a month since last year, thanks to TARP and stimulus (not to mention shrinking national income).

I spoke at the event wearing my hat as Executive Director of, a free market group which works on investor class issues.  I decided to highlight the international angle in the report.

There are two inter-related appendices in the report.  One is on the issue of worldwide taxation with deferral, and the other is on a value-added tax (VAT).  On deferral, it's pretty clear where Obama, Rangel, et al want to go.  They would like to see all worldwide income of U.S. companies taxed immediately by the IRS, and probably without a foreign tax credit.  Each of these would add a full day to the Cost of Government.

As a "solution," many domestic manufacturers and other victims of our needlessly punative and complex international tax system want to swap out our corporate income tax for a VAT.  The thinking is that the border adjustability of a European-style VAT would be beneficial to them, and would raise as much money as the corporate tax at much lower rates.

Bad idea.

As Dan Mitchell (back when he was at Heritage) pointed out, VATs in Europe started small and got big.  The average VAT rate has climbed from 5 percent in 1970 to 20 percent today.  In fact, there is a 15 percent minimum VAT rate needed to join the EU.  His research also shows that as the VAT rate rose, other taxes rose at the same time.  So, VATs simply fed the bottomless gullet of government.  VATs are opaque, since they are part of the price of a good, not on top of them like a US-style sales tax.

Others look to a VAT as the "least bad" way to fill in the unfunded liabilities of Social Security and Medicare.  As the report demonstrates, this would require a VAT rate of 12.75% at the end of the 75-year actuary predictions.  This is on top of the 15.3% FICA rate we already have.  Again, a bad idea.

What about healthcare reform?  Suppose we wanted to break the logjam that House Democrats find themselves in (surtax vs. taxing health benefits) with a new VAT?  Assuming a European-style VAT, you would be able to fund a $300 billion per year health plan (a high estimate, but a fair one, of H.R. 3200) with a VAT rate of between 5-6 percent.  That would be like doubling the sales tax in every state in America, but hiding it inside the price of the good.

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