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    Saturday, March 05, 2005

    Value Added Tax

    Similar to a straight consumption tax, many European countries have a Value Added Tax (VAT). The Wall Street Journal has a good op-ed piece describing its effects on the European economy.

    At one point is says,
    But like any tax a VAT removes resources from the dynamic private sector of the economy and places them in government hands. And in Europe it has become a major enabler of the ever-expanding, slow-growth welfare state...

    Having a VAT with a rate between 15% and 25% is now compulsory for membership in the EU. European governments get away with those rates because they generally don't show up on the customer's final receipt. By contrast, none of the U.S. state and local governments that charge an explicit sales tax get away with a combined rate of more than 9% or so...

    VATs may have the perverse effect of actually creating political pressure for other tax increases. Why? Because they place a higher relative burden on lower-income earners who spend a higher percentage of their income on consumption. So VATs have often resulted in calls for income tax rate increases to preserve the overall progressivity of the tax code...

    It seems to me that politicians trying to push the VAT on us are just trying to get a basic consumption tax on top of the income tax we already pay, and push it under the table so we don't see it and realize we're paying it. If added cost burden is a concern for adopting a consumption tax, it's definitely a concern with this.

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