Cruz and Paul’s VAT Mistake

Presidential candidates Ted Cruz and Rand Paul have proposed value-added taxes (VATs) as part of their tax reform plans.

I critique these taxes in National Review today, arguing that they could become engines of big government growth.

Cruz and Paul are champions of small government, and so their embrace of VATs is unfortunate, and also potentially dangerous.

Dangerous because VATs are probably the only way that liberals would be able to fund the huge projected growth in unreformed entitlement programs in coming years.

In a worse-case scenario under the current tax system, liberals would succeed in hiking income taxes, but they wouldn’t be able to seize much more money because the income tax base is so mobile in today’s global economy. The corporate income tax, for example, is a complex and damaging tax, but it is not capable of raising the government any more revenue than it already does.

But in a worst-case scenario under a Cruz or Paul VAT, the government would be able to confiscate far more money as the VAT rate were jacked up over time. It is no coincidence that Western European governments—with their VATs—collect substantially higher revenues as a share of GDP than we do.

In a best-case scenario, reformers like Cruz and Paul will lead the charge to cut entitlements and enact a simpler, lower, pro-growth tax code. But we have to consider how liberals will work to hijack new tax structures and try to drive us in the opposite direction.

Cruz and Paul are heroes for their battles against the GOP establishment on overspending and other issues. But I fear their tax plans would not move us in the small-government direction they want to go in over the long run.