Another look at the VAT

August 20, 2009

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.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

what is a VAT?

Posted by kyle | Report as abusive


Surely you miss the political point – politicians won’t raise VAT because it hits the voters. Witness France changing its mind two years ago on a proposed 5% increase.

I guess the trick is to get an increase in early on in the election cycle – VAT in the US anyone?

I read an article on this site that everyone (UK, France, Spain etc) will have to increase VAT in the next 1-2 years to combat the crisis. Seems like it is not restricted to Central Europe.


Posted by Richard | Report as abusive