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Europe's Fatal Affair with VAT


  • Mason Gaffney

    () (Department of Economics, University of California Riverside)


World lenders have dismissed warnings from credit rating firms and kept buying and holding U.S. Treasuries for security. The likely reason is that our tax system is stronger than Europe's. The major difference is that Europe has come to rely heavily on VATs, while the U.S. stands alone in not having any. VAT's broad tax base is not succeeding in maintaining revenues, even as tax rates climb. J.S. Mill faulted general sales taxes like VAT for taxing capital itself, not just its income, for turning over; Frank Ramsey and A.C. Pigou for ignoring different elasticities of supply and demand. Gaffney refutes the idea that such taxes foster capital formation. VAT arose in 1954 France, and metastasized quickly worldwide. It reversed two centuries of progress in tax systems and turned Europe back towards the practices of l'ancien régime before 1800. The next step is on how the U.S.A. came to adopt and develop tax systems more congenial to commerce and industry and high wages than did Europe. Credit is due to Turgot, and allied French économistes who bent the minds of our Founding Fathers. Credit is later due to leaders of The Progressive Movement who framed our early income-tax laws. Step 3 explains how Germany's Currency Reform under Erhard quickly raised Germany back from the dead, and it how it demonstrated a fundamental principle of how taxes affect incentives positively, the wealth effect. Then, the original French VAT grew as the unseen protegé of European unity, while the U.S.A. fostered VAT everywhere around the world except at home. Step 4 illustrates how Europe stagnated as VAT grew, and how banks and public exchequers grew mutually dependent, together building a house of cards based on future tax revenues – revenues that VAT cannot provide, even as it chokes off productive commerce and industry and employment. Step 5 explains the theory of the excess burdens of VAT taxation, and faults economists, both conventional and Austrian, for failing to expound and highlight these, and relate them to Europe's unstanchable flood of troubles. Step 6 traces the role of a host of economic scholars and statesmen in rationalizing, endorsing and promoting VAT, from Thomas Hobbes to the Republican Platform of 2012. Step 7 discusses the role of the cartel of international agencies and banks in promoting "harmony", in taxing, lending and collecting. It gives evidence that Europe has NOT reached the limit of its taxable capacity; rather, it needs a better tax system and philosophy, with higher rates on narrower and less elastic bases.

Suggested Citation

  • Mason Gaffney, 2013. "Europe's Fatal Affair with VAT," Working Papers 201301, University of California at Riverside, Department of Economics, revised Jan 2013.
  • Handle: RePEc:ucr:wpaper:201301

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