Like an alcoholic at a bar, Congress won’t stop at just one swig.
The value-added tax can pull in billions of dollars with a rate that seems low. Then, a small increase will net a few more billions. No wonder that almost all countries have a VAT.
Republican Sens. Ted Cruz of Texas and Rand Paul of Kentucky propose a VAT as a way to pay for cuts in income taxes. This is well-intentioned, and in theory would be a more efficient tax that could increase economic growth. In practice, Congress would never get rid of the income tax, but it would layer the VAT on top of existing levies.
Raising a VAT rate by one percentage point can bring in about $150 billion in revenue per year. That’s why once VATs are put in place, they rise over time. Congress, which comes down to the wire every year with its budget, would not be able to resist raising the tax by a small fraction. Then it would likely spend the revenue, rather than reducing the deficit. That’s why countries with VATs have larger public sectors.
Tax avoidance rises under a VAT. I lived for many years in the United Kingdom, where I saw intricate tax contortions firsthand. Contractors ranging from house painters to cleaners to gardeners would offer lower rates to be paid in cash, to avoid the VAT. My grandmother and aunt would prefer to buy underwear and sweaters in the children’s section to avoid the tax. It’s not just the U.K. Credit card machines in Italy are always broken, for the same reason. VATs in many countries are not charged on food and children’s clothing — and other items — because they are regressive, falling disproportionately on the poor, who spend more of their income on necessities than higher-income people do.
Special interests lobby to have their products declared exempt from the VAT. In the end, the tax is still regressive, and the poor need to be compensated through other programs, such as welfare or cash payments.
A VAT could raise a lot of money. But politicians are naive if they propose to substitute it for another tax. Like an alcoholic at a bar, Congress won’t stop at just one swig.
This piece originally appeared in USA Today
This piece originally appeared in USA Today