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The Drudge of the Daily News – Alternate Style

For Thought

Governments Raise Consumption Taxes While Failing to Collect Billions

A report published by the European Commission yesterday has European tax authorities with their tails between their legs. The study finds that the Value Added Tax (VAT) gap in Europe has risen to a staggering 18%. The VAT gap is the difference between what could theoretically be collected and what actually enters government coffers. In other words, almost a fifth of the theoretical value-added take-up (or $ 261 billion) goes uncollected every year by national tax authorities. This is due to a number of causes, the most important of which are fraud and evasion, miscalculations, and the poor performance of tax administrations.

These findings were not provided with a warm welcome in many European capitals, which are hoping to hike up the VAT to fill holes in their budgets. In France, where the VAT is set to increase to 20% in 2014, the government attempted to delegitimize the study’s methodology, with a senior civil servant saying that it was “not a serious study.” French authorities say that they only took in only $ 6.7bn less than they had planned. Other sources put the figure at around $ 13.5 billion. In any case, even the most conservative estimate of the VAT gap in France would have more than covered what the State hopes to take in from raising the VAT in January.

As sales tax in the United States, which differ from the VAT ultimately only in its method of collection, are collected on the state level, it is difficult to estimate what the U.S. sales tax gap may be on the national level. One study from Minnesota put the figure at $ 451 million in 2000. According to the Tax Policy Center, 2001 IRS estimates amounted to some $ 345 billion (16% of the total tax liability), principally due to underreporting by businesses.

So why don’t authorities simply invest some money in tax enforcement and save us all the grief of constantly raising the consumption tax? The sad truth is that government is lazy. Throughout history, taxing things people consume has proven an easy option, from the first congressional excise taxes on whiskey and snuff to the general sales taxes today. It doesn’t involve tiresome tasks such as conducting censuses, for example. As a form of indirect tax, consumption taxes also have the distinct advantage of tending to be less noticeable for tax payers. This is not the case when we see sums deducted from our paychecks every week.

Consumption taxes thus prove to be an easy fix for filling holes in budgets without reducing spending. On average, sales taxes in the U.S. make up just over 20% of state income. Going back to the example of France, the VAT represents a staggering 50% of the state’s income. If states invested a little more money in enforcement, the existing sales taxes could easily yield enough money to cover a sizable cut in sales tax. The sheer size of the existing tax gap leads one to believe that we are nowhere near the optimal level of spending on enforcement.

Before hiking up sales tax, governments should roll up their sleeves and do a better job of collecting existing taxes. Ironically, Mayor Bloomberg saw sales tax as a way of combating obesity, while in reality they are the cause of much government glut.

Rob is a American graduate student studying economics and finance in London, UK.

American Thinker Blog


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