Proponents of the VAT stress its efficiency in generating revenue. Hence VAT's drawbacks: it encourages big government (even supporters call it a "money machine") and it's regressive (which some progressives acknowledge). Worse, it's pernicious, as an editorial in last week's Wall Street Journal detailed:
VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%. . .VAT proponents promise offsetting tax cuts. Unlikely--as Reason magazine's Peter Suderman says, "think about how it might actually look after everyone in Congress--and all their associated interest group allies--got their hands on it." Pretty much how it worked in Europe, where they're 'trapped in a VAT' of rising rates and sluggish economies.
One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.
source: April 15th WSJ
And one more point: In Europe, this heavier spending and tax burden has also meant lower levels of income growth and job creation. From 1982 to 2007, the U.S. created 45 million new jobs, compared to fewer than 10 million in Europe, and U.S. economic growth was more than one-third faster over the last two decades, according to the Bureau of Labor Statistics.
There's got to be better tax policy than "Europeans love it, and we love Europeans." Especially since it won't work here. Unless America, too, makes vacationing a human right.
(via reader Marc, Berman Post)