Richard Nixon’s VAT

With two Republican presidential candidates embracing a value-added tax (VAT), it is worth looking back at the original federal debate over that bad policy idea.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. With a three-percent VAT in mind, Nixon called for new federal financing of local schools in his 1972 State of the Union address.   

A 1972 Congressional Quarterly article examined Nixon’s VAT. (The first link when you Google “richard nixon vat congressional quarterly”). The article reveals that the administration looked fondly on a VAT because of its large revenue-raising potential—both for funding schools and for funding a general expansion of the welfare state:

Two major reasons were apparent for the Nixon administration's consideration of a value added tax. The first was the condition of federal finances.

The budget for fiscal year 1973, which the President sent to Congress Jan. 24, included a five-year forecast showing that in fiscal 1977 the only surplus funds foreseeable would result from a proposed increase in Social Security taxes. Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

The second reason was the situation in public schools and school districts.

Tax expert Alan Schenk notes that Nixon had been plotting to impose a VAT from soon after he came into office in 1969. But imposing a new and powerful tax as a spigot to fund local government was an awful idea that would have undermined federalism and dangerously centralized fiscal power in the nation.

Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs.  

The congressional testimony highlighted in the CQ article indicates that most experts leaned against a VAT, but the ideological split was interesting. Some conservatives liked the VAT because it was “efficient,” while liberals generally disliked it because it was “regressive.”

Libertarians had a different view. The Nixon administration’s VAT proposal received a sharp rebuke from economist Murray Rothbard in a 1972 Human Events article. Some of Rothbard’s economic reasoning is dubious, but his main thrust regarding tax transparency is on target. He argued:

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes — and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

The VAT is, in short, a looming gigantic swindle upon the American public, and it is therefore vitally important that it not pass. For if it does, the encroaching menace of Big Government will get another, and prolonged, lease on life.