VAT Tax

In a 6/4/09 WSJ op-ed, Daniel Mitchell, a senior fellow at the Cato Institute, makes a well reasoned argument that the U.S. should not adopt a VAT tax.

This tax, prevalent in the EU, is like a national sales tax, a consumption tax. The more cautious proponents of its adoption in the U.S. wisely advocate the repeal of the 16th Amendment, which gave the Federal government the power to tax incomes. With the repeal, a VAT tax would replace the income tax. Without that repeal, a VAT tax would become just another revenue source for politicians to spend in addition to the income tax, a point that Mitchell makes as well.

For those who advocate a VAT tax as a protection for American goods producing businesses, Mitchell concludes that a VAT tax will not accomplish their goals.

Mitchell’s use of OECD data to compare government spending in the US and the EU suffers a flaw common to other op-ed writers, as I pointed out in in a previous blog. The EU includes 75% of its health care spending as a government expense. Although the US spends more as a percentage of GDP than any country in the world, it reports only 45% of that expense as government spending.

Mitchell writes that in 2007, “government spending now consumes 47.1% of GDP in the EU-15, significantly higher than the 35.3% burden of government in the U.S.” Let’s look at a 2005 (the latest available) comparison (On left side of screen, click Health, then Health Statistics, then OECD Health Data 2008, then Health Expenditures) of health care costs from the OECD.

In that year, the US spent over 15% of GDP on health care and reported that 45% of that expense was public tax dollars. Whether it is called a government expenditure or a private expenditure, the majority of us carry the burden of health insurance. To properly compare burdens between the US and EU, we can add in 5% of US GDP that would be public expenditure if US workers paid their insurance premiums to the Federal government instead of a private insurance company. Add that to the 35.3% that the US reports and a more accurate comparison of government spending burden is about 40%, still lower than the EU’s 47.1%.

What is your vote? Should the US 1) leave the income tax system in place; 2) replace it with a flat tax; 3) replace it with a VAT tax; 4) replace it with a savings transaction tax. Each system has plenty to be said for and against it.

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