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A VAT Comeback?


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Washington is a town where bad ideas never really die. Jimmy Carter's job creation tax credit may have been a flop in the late 70s, but that didn't prevent President Obama from resurrecting it to cope with the current economic troubles. Congress rejected a cap and trade program for greenhouse gases, but that hasn't stopped the EPA from trying to use existing regulatory authority to do the same thing.

Another bad idea that will never truly go away is the value-added tax, or VAT. Last year, as the President's Debt Commission convened to brainstorm ways to reduce deficits, Nancy Pelosi, Paul Volcker, and other leading Democrats floated the idea of instituting this form of taxation common in Europe.

Once again, the VAT came up this week with the President's appointment of Alan Krueger as Chairman of the Council of Economic Advisers. Back in 2009, Krueger discussed instituting a VAT that would take effect in two years. (He must have assumed that the then under construction stimulus program would get the economy back in shape by 2011.) This VAT would be on top of existing taxes.

The New York Times blog post in question was framed as a "discussion" point, so some have tried to downplay its significance. What is critical in my mind is that the VAT is being discussed by one of the most influential Presidential advisers.

What is the VAT? A value-added tax is a form of sales tax that is assessed at each stage of production. The tax is built into the cost of a product, essentially making the VAT a hidden sales tax. Many liberal economists like the VAT because they see it as a very "efficient" way to raise money for the government.

The VAT has helped European countries raise significantly more government revenue than here in America. Government spending is far higher in Britain, Germany, and France--all countries that have a high VAT. I don't think that is a good thing.

While the VAT has helped European countries collect more taxes, it hasn't made them any more fiscally responsible. Greece, Spain, and Portugal all have the VAT. Each of them spent beyond their means and now face sky-high deficits and the specter of default.

In his blog post, Krueger speculates that a 5 percent VAT instituted at the beginning of 2011 could raise $500 billion. With a $1.3 trillion deficit this year, the government would still have a record-setting deficit.

The government cannot take money out of the economy without any effects. The VAT has a price and that price is a less dynamic economy and lagging job growth. The complexity of the VAT system means that the government needs to hire additional IRS agents and auditors to enforce the tax. A 1984 estimate by the Congressional Budget Office showed that a VAT would lead the IRS to expand its workforce by more than 20,000. A new estimate would probably show a significant increase in the number of workers needed to enforce the VAT.

Last year, I led 154 House Republicans on a letter to the President's Debt Commission calling on them to reject the VAT. They heard our objections, and their final recommendations did not include any mention of creating a new tax structure.

I don't expect the Joint Select Committee to consider the VAT. Republican Conference Chairman Jeb Hensarling (R-TX) and Ways and Means Committee Chairman Dave Camp (R-MI) both served on the President's Debt Commission. The third House member of the super committee is Energy and Commerce Committee Chairman Fred Upton (R-MI), who signed my letter to the President's Debt Commission. While I'm confident that my Republican colleagues will stand fast against raising taxes, I expect that some Democrats will continue to be fascinated by the idea of the VAT.

From 1982 to 2007, the U.S. created 45 million new jobs compared to only 10 million in Europe. There are many causes for this disparity, but among the chief reasons is a much higher tax burden on Europeans. If we want to return to rapid job growth, we need to reform our current tax system. Adding an exotic new tax system on top of the current system would only be a drag on the economy that we don't need now, or ever.

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