Another look at the VAT
Chris Edwards of the Cato Institute notices that several New Europe countries are raising their VATs to deal with huge budget deficits and concludes thusly:
1) VATs are handy money machines for governments. Governments fear raising income taxes during recessions because of concerns over damaging their economies. But they have less such concerns with respect to VATs.
2) International tax competition continues to generate pressure for countries to keep income tax rates down. Policymakers don’t want businesses and investment capital fleeing abroad for lower taxes, particularly during economic downturns.
VATs are generally less damaging to economic growth than income taxes. But the flip side to that widely-understood result is that politicians have less fear about using them to grow the size of governments during good times and bad.