Euro Blogging: Transparency and the Value-Added Tax in the Czech Republic

Speaking to our group in Prague, Mr. Tomas Sedlacek, from the Czech Ministry of Finance, called the value-added tax (VAT) a “beautifully invisible tax” which raises lots of revenue in an efficient manner. I got firsthand knowledge of this when I purchased a souvenir, looked at my receipt, at could not find how much tax I paid on my purchase. The employees of the store could not tell me either. Later, I discovered that the VAT tax I paid was already embedded in the price of the souvenir—“beautifully invisible” indeed.

Many economists in the U.S. have urged President Bush’s Tax Reform Panel to change the federal tax base from income to consumption. This could be accomplished either through exempting savings from the income tax base (and thereby taxing only the income consumed by taxpayers) or through imposing a direct consumption tax like a VAT or a national retail sales tax. While the European experience shows us that a VAT is easy to administer, its lack of transparency would pose problems for the American tax system.

According to data presented to us by the Organisation for Economic Cooperation and Development (OECD) in Paris on Wednesday, the U.S. is the only member of the OECD that does not impose a VAT. This could be because the VAT is too good at raising significant tax revenues in an efficient (and invisible) manner. Americans, traditionally more skeptical of government power than Europeans, may not want to make it quite so easy for their government to raise tax revenues.