The Corner

The VAT Isn’t the Solution to Our Deficit

Harvard’s economist Greg Mankiw had an op-ed on the deficit in the New York Times this weekend about the deficit where he argues against the notion that a balanced budget must be our ultimate goal since, he explains, modest deficits can be sustainable. But what the level of debt we have now and are projected to face in the near future isn’t sustainable.

More worrisome is the fact that Mankiw opens the door to having a VAT (Value-Added-Tax) in our future, which he explains may be the “the best of a bunch of bad alternatives.”

A value-added tax is like a sales tax, but rather than being collected entirely at the retail store, it is collected in stages along the chain of production. Many European countries use it, and it is one of the more efficient ways to raise revenue. So efficient, in fact, that some conservatives fear that it would too easily fuel the growth of government.

He acknowledges that the VAT is not perfect:

It would raise consumer prices, lower real wages, discourage work and depress economic growth. It would also break President Obama’s pledge not to raises taxes on the middle class.

I can’t understand how supposedly free-market advocates can consider a VAT. No matter what the positive theoretical characteristics of a VAT are, we must fight it to our last and dying breath. The VAT is an enormous money machine for governments and there is no doubt that if we give politicians in Washington a new source of revenue we will get more government and more spending, more corruption and more waste. How can anyone really believe that Washington will use this new source of revenue to just pay off its debt? Look at what’s happening with the TARP funds repaid by banks: $30 billion was turned into a lending program for small businesses. Look at the projected $500 billion revenue over ten years from cap-and-trade in Obama’s budget: It’s used to pay off interest groups and new green programs. The same would happen with the revenue from a VAT.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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