Corrected VAT Lessons From Canada

J.D. Foster / May 04, 2010

Marty Sullivan, a frequent commentator on tax policy, has now apparently decided the United States needs a value-added tax (VAT). To advance the cause, he penned a brief column on “VAT Lessons from Canada” [“VAT Lessons From Canada”, Martin A. Sullivan, Tax Notes, May 3, 2010.] However, in trying to portray the Canadian VAT in the best possible light, Sullivan airbrushed a couple of the more relevant facts.

The most important fact for the United States and one stunning by its absence in Sullivan’s piece is that the only reason for a VAT debate today is that federal spending has surged dramatically and is not projected to come down materially in the coming years under President Obama’s policies. The long-run federal budget was already on an unsustainable course due to entitlement spending, and now Obama has managed to put the budget on an unsustainable course even in the short term. The responsible and correct action to take is to bring spending back toward historical levels. The alternative is a massive tax hike. Enter the VAT, escorted by Sullivan & Co.

As Sullivan notes, the federal rate on the Canadian VAT, known as the General Sales Tax (GST), stands at 5 percent while the provincial rates are between 7 and 8 percent. The GST replaced a “clunky old 13.5 percent tax imposed on sales by manufacturers”. The GST is surely a better system than the tax system it replaced. But notice what occurred in Canada — a modern, efficient sales tax replaced a “clunky” old sales tax. Canada did not add a tax. The driving motivation of VAT proponents in the United States is not tax reform, it’s tax addition. (more…)