Searching for ways to avoid making tough decision on reduced government spending, policy makers in the US are seeking new sources of revenues. The flavor of the day is a tax on consumption, in its favored form of a value-added tax (VAT).
Part of the support for a VAT is that most economists believe that taxing consumption is more efficient than taxing income. However, this is a preference of one form of taxation over another.
It is clear that there is no intention to replace income taxes with a VAT. The idea is simply to have both. This will be a stupid mistake that will reduce economic growth by increasing the overall tax burden.
A lot is at stake: it is estimated that a VAT of 5% were imposed on economic activities in the US would raise $161 billion in 2012.
But the amount of anticipated tax revenues almost always disappoints since forecasts tend to underestimate the dynamic effects of a higher tax burden on investment or consumption.
Since politicians tend to base spending plans on such revenue estimates, growing budget deficits will lead to an insistence on raising the VAT rate.
Promoters of VAT are either disingenuous or ignorant in overlooking the inexorable rise of VAT rates in Europe, as well as the introduction or increase in other taxes.