One reason many free-marketeers want to take a pass on a value-added tax is that it would only fuel bigger government via higher tax revenues. Indeed, the good folks at TaxVox find new research that helps make that case (bold is mine)”
Don Marron explains thusly:
Taxes on income, for example, are usually worse for the economy than taxes on consumption. That’s why there’s a rising chorus of economists recommending the introduction of a value-added tax, rather than higher income taxes, if our nation decides it wants to support substantially higher government spending. High tax rates similarly tend to be worse for the economy than low rates. That’s why economists usually favor broad tax bases and low rates, rather than narrow tax bases and high rates. Finally, it’s preferable to levy taxes on bads rather than goods. Where appropriate, taxes on pollution (e.g., emissions of greenhouse gases) should thus be preferred over taxes on working, saving, or investing.
Greg Mankiw does a good explaining the value-added tax. But this is ominous:
From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult. … My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.
I have been exchanging emails with economic analyst Bruce Bartlett, a supply-side economist who has come out for higher taxes. (See the NYTimes article on him earlier this week.) Bartlett (who blogs at the wonderful Capital Gains and Games) thinks Uncle Sam will never cut spending, thus taxes must go up, preferably in the form of a VAT. He also has book coming out next week, The New American Economy: The Failure of Reaganomics and a New Way Forward.
A good point on the political dangers of a VAT from David Henderson of EconLog:
But here’s what’s not a quibble: what happened to the political fortunes of the Canadian government that imposed that tax, something that Leonhardt doesn’t mention. Brian Mulroney, the Canadian prime minister at the time, imposed the tax at an initial whopping 7%. It’s true that it replaced a narrower hidden 13.5% tax on manufacturing and that it was designed to be revenue-neutral. But precisely because the GST was visible, it generated enormous opposition. The Liberal Party made repeal of the GST one of its main issues in the 1993 election. By then, Mulroney’s party, the Progressive Conservatives, had kicked him out and replaced him with Kim Campbell. Granted that Campbell ran one of the most incompetent campaigns in Canadian history and granted that there was a recession on at the time. But do you care to guess what happened to the number of seats in Parliament that the Progressive Conservatives won in that election? Let me give you a hint. They started with 169 out of 295 seats. And they ended with a number that can be counted on the fingers of one hand. To be precise, they ended with 2 seats, a 99% drop, and, a few years later, the Progressive Conservative Party disappeared via merger.
You can add New York Times economics columnist David Leonhardt to the parade of liberals, Democrats, Obama allies and fellow travelers — such as John Podesta, Nancy Pelosi, Paul Volcker, and Robert Rubin — calling for higher taxes, preferably a value-added tax.
When you start looking for signs of the VAT virus, you start seeing them everywhere. Here are some excerpts from Howard Gleckman over at TaxVox, the blog of the Tax Policy Center:
At the Atlantic magazine symposium I am attending, former Federal Reserve chairman again said he thinks taxes are going up and that a value-added tax would be the “least worst” way of doing it. This dovetails nicely with what I wrote yesterday: