Does the VAT Increase Government?

Daniel Mitchell from CATO argues that we shouldn’t accept a VAT. He makes 3 major points. My comments are bulleted. 

1. A VAT on top of our existing income tax wouldn’t reduce the “economic distortions” of our current tax code.

  • Well that’s hard to argue with. I’d hope we could ultimately replace the complexity of the old system with a simpler tax like a VAT. 

2. Starve the Beast. Mitchell writes,

Simply stated, there’s no way to finance all this new spending without an added broad-based tax. But this is exactly why we should vigorously resist a VAT.

Blocking a VAT may not be sufficient to control the size of government, but it’s necessary. Handing Washington a whole new source of revenue would be akin to giving keys to a liquor store to a bunch of alcoholics.

  • The problem with this argument is that “starve the beast” doesn’t work (see: here and here) – we get more spending anyway along with less revenue. It’s a great way to continue our path of huge deficits and will eventually lead to recessions and insolvency. 

3. A VAT will increase the size of government – i.e. feeding the beast will make it grow. He writes,

The real-world evidence shows that VATs are strongly linked with both higher overall tax burdens and more government spending.

  • Most of the evidence he points to reveals correlation not causation. I’m not saying he’s wrong, it is just hard to know. This ties into his overall narrative that “blocking a VAT” is “necessary” to “control the size of government.” I actually may have assumed he was right but a day earlier I read this at Marginal Revolution: “In a purely statistical sense, there is, thus, no strong evidence that the VAT has in itself caused the growth of government.” That’s from a paper Tyler Cowen links to which surveys a lot of evidence about the VAT around the world. 
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