“”(W)henever I suggest the idea of a VAT for the U.S., I am attacked by supply-siders and assorted right-wingers….(M)y friend Larry Kudlow criticized me for wanting to “Europeanize the American economy.” Their concern is that the VAT is a money machine that will lead to higher taxes and bigger government precisely because it is such a “good” tax.
I myself held this same view for many years. But eventually I decided that it was stupid to oppose something because of its virtues. Opposing a VAT because it’s too good is like breaking up with your girlfriend because she is too beautiful.
In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false. It just means that the total burden of taxation including the dead-weight cost is vastly higher than it needs to be. If we raised the same revenue more sensibly we could, in effect, give ourselves a tax cut by reducing the dead-weight cost.
Those who oppose big government would do better to concentrate their efforts on actually cutting spending. The idea that holding down taxes or insisting that we keep a ridiculously inefficient tax system because that will give us small government is juvenile. If people want small government, there are no shortcuts. Spending has to be cut. But if spending isn’t cut, then I believe that we must pay our bills. I think it’s better to do so as painlessly and efficiently as possible. That’s why I support a VAT.”