James Pethokoukis

Politics and policy from inside Washington

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.

Comments

what is a VAT?

Posted by kyle | Report as abusive
 

Hi

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 http://www.tmf-vat.com 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.

Richard

Posted by Richard | Report as abusive
 

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