November 3, 2010

At What Cost? Basic Economics of a Value Added Tax

Most developed economies rely on a value VAT for a substantial share of their tax revenue, so it is natural for the United States to look at the possibility of implementing a VAT, especially while huge budget deficits are forecast as far out as the forecasts go. While one can debate the merits of a VAT in other countries, the tax is clearly not a good fit for the United States. It would tax a base that has traditionally belonged to state governments, its introduction would bring with it intergenerational inequities, its cumbersome structure would impose large compliance and administrative costs, and it would slow economic growth. Reduced economic growth would diminish tax revenue from all tax bases. This study projects that if the United States introduced a VAT in 2010, its net effect on tax revenue would be minimal by 2030 because VAT revenue would mostly be offset by declines in revenue from other tax bases. Meanwhile, slower gross domestic product (GDP) growth would also mean that government spending as a share of GDP would rise.

Why is a Value Added Tax (VAT) wrong for the United States? How much would it cost? What would the unseen or unanticipated effects likely be? Join the Mercatus Center and learn more about this controversial suggestion.

Randall G. Holcombe is DeVoe Moore Professor of Economics at Florida State University. He received his Ph.D. in economics from Virginia Tech and taught at Texas A&M University and Auburn University prior to coming to Florida State in 1988. Dr. Holcombe is also senior fellow at the James Madison Institute, a Tallahassee-based think tank that specializes in issues facing state governments. He served on Florida Governor Jeb Bush's Council of Economic Advisors from 2000 to 2006, was president of the Public Choice Society from 2006 to 2008, and was president of the Society for the Development of Austrian Economics in 2007.

Dr. Holcombe is the author of twelve books and more than 100 articles published in academic and professional journals. His books include The Economic Foundations of Government, Public Policy and the Quality of Life, From Liberty to Democracy: The Transformation of American Government, and Entrepreneurship and Economic Progress.