James Pethokoukis

Politics and policy from inside Washington

The conservative case for a VAT

December 16, 2010

Over at NRO, Duncan Currie gives it his best shot:

Despite being more efficient than an ordinary sales tax, a VAT carries significant administrative costs, and piling it on top of the present U.S. tax structure would be a mistake. But using the VAT to eliminate a sizable amount of distortionary U.S. income taxes would yield a far more growth-friendly system than the one we have today. Over the long run, America must reorient its economy away from consumption and toward investment while boosting its dangerously low savings rate. A VAT is certainly not the only way to promote those objectives, but it should at least be part of the conversation.

In the piece,  Currie more or less outlines a proposal similar to what Gov. Mitch Daniels suggest a month or so ago: Lower existing taxes rates and add a VAT.  I don’t believe he means for this to be a tax increase. Higher government revenue would come from higher economic growth.  Of course, many liberals see a VAT as an efficient way to dramatically raise taxes. Roger Altman, perhaps the replacement for Larry Summers in the White House, has recommended a $500 billion VAT.

In theory, I don’t have a problem with the Currie-Daniels approach, though I would prefer to have the income tax repealed. I also don’t think it would automatically lead to higher and VAT taxes and higher and higher spending — especially not after reading this piece. As Currie notes:

Moreover, while the VAT can lead to higher spending, it does not inevitably have that effect. Consider what happened in Canada, where the Progressive Conservative government of Brian Mulroney implemented a federal VAT in 1991. Since then, as economists William Gale and Benjamin Harris of the Urban-Brookings Tax Policy Center point out, “the size of the Canadian federal government has shrunk significantly.” The VAT rate started at 7 percent, but it has fallen to 5 percent under the Conservative government of Prime Minister Stephen Harper, which has also slashed corporate taxes.

In New Zealand, it was a neoliberal Labour government that embraced the controversial consumption tax. During the mid-1980s, Prime Minister David Lange and his finance chief, Roger Douglas, spearheaded a radical program of fiscal consolidation that included massive income-tax reductions, deep spending cuts, ambitious deregulation, and a 10 percent VAT.

Comments

Gale + Harris also mention that there is a sub-national level of VAT in many of the Canadian provinces which is added on to the federal rate, resulting in total VAT rates as high as 13%. Other provinces (the “hold-outs”) who have not harmonized their provincial sales taxes with the federal GST to form the Harmonized Sales Tax “HST”, continue to impose single stage sales taxes, which, unlike the VAT / HST, are not recoverable by way of deduction or input tax credit. This is with the exception of the natural resource rich province of Alberta which has no provincial sales tax. From 2013 Canada intends to impose a Corporate Tax rate of 15%. Certainly a decent model for any US VAT architects to look at.

Posted by CanuckinKL | Report as abusive
 

Post Your Comment

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 http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •