The Tax We Cannot See

One of the principle conservative objections to a value-added tax is that it is "invisible" to consumers. In other words, we would go about our daily consumer lives, shopping and swiping our debit cards, without knowing that somewhere, deep inside the price tags, lives a phantom tax on various stages of the production cycle. They worry that it is harder to conjure emotional opposition to taxes you can't see. That will make it easier for the government to raise revenue, which makes it easier for the government to finance its growth.

Bruce Bartlett has a nice rejoinder to this invisible tax/money machine argument:

The VAT is a money machine. This is probably the biggest problem most conservatives have with the VAT ... To keep taxes low, they believe we should raise them in the most painful and burdensome manner possible.

In response, I would make three points. First, we will only enact a VAT if we really, really need a lot of new revenue; i.e., a money machine. If by some miracle Congress enacts massive spending cuts that significantly reduce benefits for the largest, most politically powerful and fastest-growing voting bloc in the country--the elderly--thus preventing the need for higher taxes to avoid a financial crisis, then there is no need to consider a VAT. But that's not going to happen except in a libertarian fantasy world.

Second, it's not true that VATs always rise once implemented. Of the 29 members of the Organization for Economic Cooperation and Development with a VAT--the U.S. is the only country without one--four have never increased their VAT rates and seven others have reduced theirs over time. The average VAT rate in the OECD is actually lower today than it was in 1984: 17.61% today vs. 17.79% then.

Third, it is critical to differentiate between those countries enacting VATs before the great inflation of the 1970s and those not initiating one until after. The first group did raise their VAT rates a lot by piggybacking on inflation. But in the era of relative price stability since the 1980s, there is little evidence that the VAT is a money machine. In the 17 countries enacting VATs since 1977 the average rate increase is less than a percentage point.