Want big government? Add a VAT

We estimate that each percentage point of a U.S. VAT would provide Washington over 10 years with approximately $981 billion with which to launch new spending. So even a small VAT might help reduce the debt-to-GDP ratio. But by making reforms to entitlement spending less likely, VAT revenues would also lead to a permanent increase in spending to 24% or more of GDP (compared to the historic average of 20%).

Total federal taxes would almost certainly increase to at least 24% of GDP (a 25% rise compared to the historic average). As a result of the drag of taxes on growth, we estimate that long-run output would permanently be nearly 3% lower than currently forecast. And, as has occurred in Europe, the VAT rate and revenues would over time inexorably increase—and so would the damage to private-sector jobs and incomes.

We estimate that each additional $1 trillion of revenue to the government from a VAT would cost the private economy at least $2 trillion, composed of $1 trillion of taxes and $1 trillion of lost GDP.