Value-Added Tax
12th September 2010
The fundamental problem with the VAT is political — or more precisely, a public choice problem rather than a fiscal economics one. The hidden nature of the VAT makes it a politically feasible way to creep up tax revenues, because of the fact of rational political ignorance on the part of voters, and public choice incentives on the part of politicians to increase government and the concomitant revenues to fund it. This is a slightly different point than Mitchell makes in his piece; Mitchell focuses on more revenue streams available eventually equals government to match, as Friedman argued. But the specific argument against the VAT is the politically hidden nature of the tax, because it is imposed at each stage of value-added, but then is no longer visible to the end user as a tax, but merely as part of the “cost.” If you’re a voter, that should be a bug, not a feature. If you’re a member of the political class, so to speak, it is much more likely to be regarded the other way around.