More Evidence against the VAT

Kathryn Nix / August 31, 2010

In the ongoing discussion on how best to address the nation’s out-of-control deficit spending, one proposal would increase taxes by adding a value-added tax (VAT) on top of the current tax system. Proponents argue that a new tax on consumption would raise the needed revenues to close the deficit gap without the negative economic effects of raising the income tax.

However, rather than putting Washington’s fiscal house back in order, a VAT is more likely to grow the size of government and encourage growth in spending—effects that would be counterproductive to its intended purpose.

Recent analysis by Douglas Holtz-Eakin and Cameron Smith finds that in addition to the existence of a “strong, indisputable, positive relationship between use of a VAT and government spending as a fraction of GDP,” evidence points to a causal relationship between the creation of a VAT and growth in government. (more…)