By contrast, countries that have adopted VATs since inflation subsided have been much more restrained in raising their VATs. And those that have adopted VATs during the era of relative price stability that we have enjoyed for the last 20 years show no money machine evidence at all. Indeed, some of them are even starting to cut their VAT rates. Slovakia and the Czech Republic have both recently cut their VATs from 23 percent to 19 percent.
Looking at the data, we see that the average increase in VAT rates for countries where the tax was established before 1974 is 7 percentage points and the median is 6.5 percent. For those where the VAT was established later, the average is just 1 percent and the median is zero.
Furthermore, not all countries introducing VATs have seen their overall tax burden rise. Taxes as a share of the gross domestic product have fallen from 29.8 percent in Japan the year its VAT was introduced to a current level of 25.8 percent. In Canada, the tax-GDP ratio fell from 36.4 percent to 33.9 percent. Other countries where the ratio has fallen since the VAT was introduced include Australia, the Czech Republic, Finland, Ireland and Poland.
Serious academic studies have concluded that the VAT cannot be blamed for raising the overall burden of taxation even in countries where it was a new tax and not a replacement for some existing tax. Writing in the prestigious National Tax Journal in December 1985, economist J.A. Stockfisch found no support for the view that VATs raise either the tax level or government spending.
A 1990 study for the American Petroleum Institute by Diana Fuchtgott-Roth, now chief economist for the U.S. Department of Labor, came to the same conclusion: "VAT rates and revenues have increased in OECD countries with VATs. However, these increases have been offset by a slower growth of other forms of taxes, leaving the aggregate growth rate of taxes the same."
The VAT may or may not be a good idea for the United States. But it should not be casually dismissed as a money machine without serious analysis of the trade-offs. It may turn out to be the least bad way of financing needed tax reforms and the massive growth of federal health care spending that neither the White House nor Congress shows any interest in restraining.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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