The VAT as "Money Spinner"

January 11, 2011

For about 15 years, (that is, until Jack Abramoff's misdeeds forced the rewrite of Congressional travel rules), the Tax Foundation was privileged to host delegations of congressional staff on educational trips abroad to learn first-hand how taxes affect international business and trade.

During the London stop on one of those trips, a senior official in Britain's Inland Revenue Service briefed us on the UK tax system. When it came to the topic of Britain's Value Added Tax, he said something to the effect of, "If you want a tool to fund big government, the VAT is the perfect tool. It is perfectly hidden from view, and you can always dial up the rate whenever you need more money."

Needless to say, our jaws dropped at his candor and I suspect that many of those staffers may remember that meeting to this day.

Yesterday, British taxpayers learned this lesson firsthand when the country's VAT rate was raised from 17.5 percent to 20 percent as a key component of the Conservative government's deficit reduction plan.

Chancellor of the Exchequer Geoffrey Osborne defended the move on BBC Radio 4's "Today" program:

Once we had decided that at least part of dealing with the deficit had to come from a tax rise, it struck us that VAT was the least damaging tax rise. The main alternatives would be a rise in income tax or a rise in national insurance, and we thought that both of those would be far more economically damaging and therefore to be avoided.

Osborne is certainly correct that raising consumption taxes is less harmful economically than taxing capital or labor. But, British citizens should be guarded against the possibility that some of the new revenues from the VAT hike go to fund bigger government rather than pay down the nation's mounting public debt.

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