http://online.wsj.com/article/SB10001424052702304198004575172190620528592.html
Europe’s VAT Lessons
Rates start low and increase, while income tax rates stay high.
One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.
VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%.
As Americans rush to complete their annual tax returns today, there is still some consolation in knowing that it could be worse: Like Europeans, we could pay both income taxes and a value-added tax, or VAT. And maybe we soon will. Paul Volcker, Nancy Pelosi, John Podesta and other allies of the Obama Administration have already floated the idea of an American VAT, so we thought you might like to know how it has worked in Europe.
A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is a little under 20%. In the U.S., a federal VAT would presumably be levied on top of state and local sales taxes that range as high as 10%. Some nations also exempt food, medicine and certain other goods from the tax.
In the U.S., VAT proponents aren’t calling for a repeal of the 16th Amendment that allowed the income tax?and, in fact, they want income tax rates to rise. The White House has promised to let the top individual rate increase in January to 39.6% from 35% as the Bush tax cuts expire, while the dividend rate will go to 39.6% from 15% and the capital gains rate to 20% next year and 23.8% in 2013 under the health bill, from 15% today. Even with these higher rates, or because of them, revenues won’t come close to paying for the Obama Administration’s new spending?which is why it is also eyeing a VAT.