Does the Existence of VAT Raise Government Spending?
In his NRO oped Daniel J. Mitchell claims it does:
VAT might have some theoretically attractive features, but it is a perniciously effective way of raising revenues and inevitably leads to bigger government. The best evidence comes from Europe. Back in the mid-1960s, the burden of government in Europe wasn’t that much higher than it was in the United States. Tax revenues consumed about 30 percent of gross domestic product in Europe. The U.S. had a small advantage: The tax burden, including state and local governments, was about 27 percent of GDP. But then European governments started adopting the VAT. Denmark was the first to do so in 1967. France and Germany followed, with many other European nations imposing the tax within 5 years.
I’m not expert on the history of this tax but this source has it being introduced by France in 1954. Current VAT rates are given by this source. The VAT rate varies across nations, so one might like to see how this correlates with the spending to GDP ratio.
Which brings me to a very good discussion on spending and taxes in general from Matthew Yglesias entitled “The Looming Crisis”, where Matthew takes on Greenspan’s Garbage:
Obviously, raising the requisite tax revenue would be politically difficult. Especially in an era when one of the country’s top economic policy officials can testify before congress in a manner that simply assumes that spending 40.7 percent of GDP on the public sector would be intolerable. International comparisons, however, indicate that it’s perfectly tolerable.
Note that unlike Dr. Mitchell, Matthew provides a nice table of OECD data as to the spending to GDP ratio dating back to 1987. I’m not sure if I can detect a relationship between the VAT rate and the ratio of spending to GDP using Matthew’s data with that from the International Trade Administration but even if there is some positive correlation (which Dr. Mitchell fails to provide), is it higher tax rates leading to higher spending or is the cause-and-effect in the other direction?
Oh, but now I’m asking way too much from the Econopundits at NRO. Of course, if the NRO has any serious suggestions for curbing government spending – maybe they’d like to share them with us.