April 6, 2005


Feed the Beast (BRUCE BARTLETT, 4/06/05, NY Times)

GROWING numbers of policy analysts and politicians are saying that it may finally be time to consider a value-added tax as part of our federal revenue system. In years past, I would have been in the forefront of those denouncing the idea. But now, reluctantly, I have joined the pro-V.A.T. side. Here's why.

There are many arguments against a value-added tax, which is essentially a sales tax that applies at each stage of production. It is costly to put into effect, and it hits the poor and the elderly hardest because they spend a higher percentage of their income.

When the idea of a value-added tax for the United States first arose during the Nixon administration, there was no question that it would have fueled the growth of government, just as it did in Europe. As a recent Wall Street Journal editorial pointed out, in the countries that established a V.A.T. in the 1960's and early 1970's, taxes as a share of the gross domestic product have risen significantly.

But the main reason for this is that it was too easy to raise V.A.T. rates amid the double-digit price increases of the inflationary 1970's. In those days, there were many economists who still believed that budget deficits caused inflation, making it easier to delude people into thinking that higher taxes were necessary to get inflation under control.

Those countries that adopted the value-added tax since the end of the great inflation, however, have been very restrained in raising rates. Of those countries that had a V.A.T. before 1974, all have raised their rates by an average of seven percentage points. But of those countries that established a V.A.T. since 1974, the average increase is just one percentage point, and a majority have not increased their rates at all.

A consumption tax should be authorized via a new constitutional amendment that repeals the 16th.

Posted by Orrin Judd at April 6, 2005 12:00 PM

Just as long as a supermajority is also required to raise the rate. Sure would sell a lot of cars the couple of months BEFORE it goes into effect.

Posted by: Rick T. at April 6, 2005 1:28 PM

There's no reason for a supermajority. Even a MoveOn.org supporter understands that a 22% VAT takes a larger percentage than a 21% VAT. The supermajority becomes necessary when the K Street crowd gets its paid monkeys in the Senate like Domenici and Stevens to start larding up the tax code with goodies for favored industries, thus rendering the IRC completely unintelligible and illogical.

Posted by: bart at April 6, 2005 1:34 PM

The expansion of the Commerce Clause since the 16th amendment was adopted may mean repealing it would not protect us against an income tax.

Posted by: David at April 6, 2005 6:35 PM

It would be tough for the Supreme Court to use the Commerce Clause were we to pass a law specifically negating the 16th Amendment, i.e., 'The Congress shall have no power to lay and collect taxes from incomes...'

You'd have to go the Zimbabwe Supreme Court to find foreign precedent sufficient to change that language to allow a Federal income tax.

Posted by: bart at April 6, 2005 6:50 PM

A VAT is a good idea, especially as is charged on imports and rebated on exports and complies with WTO rules. However, it should not be the only tax. the income tax should be retained with lower rates and higher deductions. The point is to raise the revenue without beating on anyone activity or sector of the economy.

Posted by: Robert Schwartz at April 7, 2005 1:50 AM

Unless you are in the tax compliance business there is no good reason for the income tax and other similar forms of revenue collection to exist. It is simply nobody's business, least of all the government's, how much you earn or own, unless you're doing some narrow specific matter like applying for a loan. If I don't hand the bus driver, the coffee shop waitress and you guys my last three years tax returns and last six months of bank and financial statements every time I see them or you, why should I allow some stranger in DC the privilege?

Posted by: at April 7, 2005 6:59 AM

The benefits of automatic compliance, simplicity and transparency, to name but a few, seem overwhelming.

If there is a good argument against eliminating ALL taxes except VAT, I sure can't think of one.

Well--maybe one. The mortgage interest deduction strongly engourages home ownership, which is fundamental to strong communities. Do the advantages of a VAT outweigh losing the interest deduction, or is there a way to integrate such a deduction with a VAT regime?

Posted by: Jeff Guinn at April 7, 2005 8:26 AM