….our aging population and unconstrained entitlement programs mean that a dramatic expansion in the size of government will occur automatically in coming decades unless Medicare, Medicaid and Social Security are reformed. Simply stated, there’s no way to finance all this new spending without an additional, broad-based tax. That’s exactly why a VAT — which is like a national sales tax collected at each stage of the production process, rather than at the final point of sale — should be resisted.
The classical argument in favor of a VAT says that it’s desirable because it has a single rate and is based on consumption. It is true that single-rate systems (assuming a reasonable rate) are less harmful than discriminatory regimes with “progressive” rates. It’s also true that a consumption-based tax would not inflict as much damage as our internal revenue code, with its multiple layers of tax on income that is saved and invested. But these arguments only apply if a VAT replaces the current tax system — which is not the case here. And the evidence from Europe suggests it’s not a good idea to add a somewhat-bad tax like the VAT on top of a really bad tax system.
It’s also a “hidden” tax in that you won’t know what the true total tax is. It’s kind of like indexing politicans’ pay rases to the rate of inflation so they won’t suffer the political fallout of voting themselves money.