Henderson on the Case Against a VAT
By David Henderson
Take Europe, where the VAT is a major source of government revenue. When Belgium, France, Germany, Ireland, Italy and the Netherlands adopted a VAT–all between 1968 and 1971–their stated revenue goal was neutrality: Gains in revenue from the VAT were to be fully offset by reduced taxes elsewhere. (France already had a VAT but needed to revise it to meet European Economic Community Standards.)
All failed. Government revenues–and spending–rose substantially as a percentage of GDP. In 1967 in France, the year before that country adopted its EEC-compliant VAT, total government revenues were 33.4% of GDP. In 1968, France adopted a VAT rate of 13.6%. By 2014, its VAT rate was 20% and government revenues were a whopping 45.2% of GDP. When Britain adopted a VAT, the government’s stated goal was to reduce revenue. That failed, too.
Only one country, Denmark, adopted a VAT to increase revenues. It succeeded.
This is from David R. Henderson, “It Makes It Too Easy for the Government to Raise Money,” Wall Street Journal, February 29, 2016, R3.
On the other side, arguing for a VAT, is Columbia Law School professor Michael J. Graetz.
We didn’t get to see each other’s various drafts while writing and revising.
By the way, one of the sources that helped me a lot was Randall G. Holcombe and Jeffrey A. Mills, “Is Revenue-Neutral Tax Reform Revenue Neutral,” Public Finance Quarterly. Vol. 22, No. 1. January 1994: 65-85, especially the table on Europe’s VATs on page 73.