Olivier Garret grew up in France, where there has been a value-added tax since the 1950s. He describes the tax as “a license to steal.” Obama administration officials and some others in recent days have been speaking of bringing a VAT to the United States. Garret warns doing this could seriously harm the country while enabling government to spend even more money.
Garret moved to the United States in the 1980s after majoring in taxes and finance and earning his master’s degree in business from the Université de Paris IX-Dauphine. Since 2007 he has been chief executive at Casey Research, which provides economic research and forecasts to individual and institutional investors. Before that we was a “turnaround” specialist who rescued several failing firms, and was CEO and general manager at companies ranging from start-ups to divisions of a Fortune 500 company.
Budget & Tax News Managing Editor Steve Stanek recently spoke with Garret about his views on the VAT.
Stanek: We’ve been reading and hearing a lot lately about the possibility of a national value-added tax in the United States. You grew up in Europe, where VATs have been around a long time. What do you think of the idea?
Garret: Well, with [former Federal Reserve Chairmen] Paul Volcker and Alan Greenspan and some other influential people chiming in, it looks like it’s becoming a possibility.
The average VAT in Europe is about 20 percent—from about 16 percent up to 25 percent in Sweden. France is just under 21 percent with the standard rate. France raises half of its total withholdings through the VAT. It’s a very, very powerful tax. No other tax is like it.
[Editor’s note: A VAT is imposed on nearly all goods and services at each stage of production that increases the value of the product. Consumers ultimately pay the tax.]
It’s a tax almost nobody objects to, because they don’t see it. The price you pay for nearly everything is inclusive of the VAT. Not so long ago, cars for VAT purposes were considered luxury items in France. People were paying a 33 percent VAT on that car.
Imagine if you were buying something that cost $30,000, your final cost was $40,000, and you could see the government was pocketing $10,000. You would get very upset. But because of the way the VAT works, people don’t see it.
Stanek: So it’s not like a sales tax. When you buy something, your receipt shows the cost of the item and the separate cost of the sales tax that was added on.
Garret: Correct. The VAT is hidden in the purchase price, which makes the tax easy to increase.
I left France in the early years of the Mitterand administration. He was a socialist and elected on a platform of change, capital controls, and increased income tax on the rich. There was a six-month battle over the changes, and the government backtracked on most of the income tax changes.
About six months later, they recommended going from 17.6 to 18.6 percent in the VAT, which raised about 10 times more than would have been collected if they had succeeded in raising the income tax. That money came from everyone who bought something.
Despite this, the VAT increase was barely mentioned in the press. Le Monde had a short article on the day the VAT increase was passed. A VAT is a license to steal without people knowing it.
Stanek: You just mentioned the tax increase hitting everyone. President Obama pledged only the highest-paid people would see tax increases if he became president.
Garret: Yes. A VAT is regressive.
For this reason I think it’s going to be a difficult tax for Obama to pass. The higher you are on the income scale, the more you tend to save and the less you tend to consume as a portion of earnings.
This is why, with him promising no tax increase on the middle class, it’s going to be hard to sell that bill. But if they succeed, it would be the easiest way for them to increase dramatically the tax rate on the country.
Stanek: A big argument for the VAT is to bring in more money to reduce the government’s debts and budget deficits. Yet England and Greece and some other European countries have worse problems than we have, and they all have VATs.
Garret: The more tax income government receives, the more it spends. One of the beauties of large deficits is that they should normally force you to tighten your belt. Unfortunately, we don’t hear anybody in Washington talking seriously about doing this. Republicans say some things about it, but they don’t have a good track record.
Stanek: Do you see anything good about a VAT?
Garret: A VAT is less distorting than some other taxes because it affects every aspect of the economy. In itself, the VAT provides some good incentives. It would encourage savings, but that’s assuming savings are not taxed excessively, which in the United States they are.
The problem is, I can almost guarantee it would be easy to increase the U.S. tax burden to what’s in Europe, which is 50 percent on average. Because it’s a hidden tax and is so efficient, it’s a license to steal.
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.