Paul L. Caron
Dean


Monday, April 9, 2012

Sullivan: Was the VAT a Money Machine for Europe?

Tax Analysts Martin A. Sullivan (Tax Analysts), Was the VAT a Money Machine for Europe?, 135 Tax Notes 143 (Apr. 9, 2012):

In 1965 there was not a big difference between the level of taxes in the United States and in Western Europe. Then the Europeans put their VATs into high gear.

Virtually nonexistent in 1965, Western European VATs had an average rate of 11% by 1976 and 20% by 2007. As VATs became increasingly prominent, overall tax revenues in Europe grew in tandem. Between 1965 and 2007, average total tax as a percentage of GDP grew by a stunning 11.6 percentage points -- from 27.8% to 39.4% of GDP (Figure 1). Meanwhile, in the United States -- the only developed country to avoid adopting a VAT -- the overall level of tax grew by only 3.2 percentage points, from 24.7% to 27.9% of GDP.

Figure 1. Total Revenue as a Percentage of GDP, Western Europe and the United States, 1965-2007

Figure 1

The European experience is often used as an argument against considering a VAT in the United States. It would be a "fast track to a European welfare state," according to Daniel J. Mitchell of the Cato Institute (Will Republicans Hand the Left a VAT Victory?The Wall Street Journal, Jan. 4, 2012). Even if that were true in Europe, why would it be true in the United States?

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Comments

Your report is intriguing. The reason for the different in the average vat percentage and the average total tax as a percentage of GDP will have to be broken down to have any real meaning. This will paint a much clearer picture.

Posted by: Scop | Apr 9, 2012 1:46:10 PM

Seriously? Government Revenue (Spending minus debt, I assume) as a percentage of GDP? Without showing what the GDP is? Really?

A. What if GDP shrank? If "revenue" stayed the same, the percentage of GDP made up of "government revenue" (or government spending) would necessarily increase.

B. IF GDP remains constant, all this measure would mean would be that the productive part of the nation(s) were accounting for a smaller and smaller absolute dollar(Euro) amount.

C. Even if GDP grew, the actual economy would simply be accounting for a smaller and smaller percentage of that GDP. Indicating an approaching economic stagnation (i.e., an economy which grows a smaller and smaller amount each year). Because the government(s) won't reduce spending, borrowing will increase inevitably to an unsustainable and unmanageable amount. It can't go on forever.

Gee? Which do you suppose has actually happened? Increased Government "Revenue" has created the promised "socialist" (a.k.a. communist) utopia? Or, the leech of government has drained the productive economy dry, and the superhumanly-brilliant Keynesians have killed the goose that lays their golden eggs?

Read any news from Europe lately?


This is what comes of using a Keynesian-invented measure (GDP) to judge a non-Keynesian free market.

Posted by: Uriel | Jun 2, 2012 7:52:55 PM