The Corner

VAT, Again

The WSJ wades deeper into the VAT debate here. Plenty to digest, but this strikes me as a little disingenuous:

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%. Europe’s individual income tax rates have fallen since the 1980s, following the U.S. lead in the Reagan era, and European corporate tax rates have come down even more sharply. But the drive of this decline has been global tax competition, not the offsetting burden of the VAT.

There’s some truth to that, although it’s worth pointing out that Europe’s sales taxes were not designed (or sold) as a fully fledged alternative to income tax. The fact also remains that (given Europe’s political realities) those eventual — and far too modest — cuts in the rates of income and corporate tax described by the WSJ were facilitated by the fact that this alternative, and very efficient, source of revenue existed.

And this, I’m afraid, proves nothing:

Greece has a VAT rate of 21%, but its debt as a share of GDP is 113%.

The real problem in Greece (outside the malignant consequences of its admission into the eurozone) is the combination of high public spending and (thanks to widespread tax evasion) a relatively low tax take. You cannot have both. Take a look, for exaple, at this recent piece from Bloomberg News, and in particular this:

Prime Minister George Papandreou…says that Greek workers and companies have skirted tax worth 31 billion euros, more than 10 percent of gross domestic product. Greece’s revenue from income tax was 4.7 percent of GDP in 2007, compared with an EU average of 8 percent, EU statistics show. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a euro region-low of 32 percent even as economic growth averaged 4.1 percent a year.

To vote for a welfare state but to refuse to pay for it is not a very clever idea.

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