A Potential Poison Pill In The Republican Tax Plan
That would be very bad for those who care about restraining the growth of government.
Because the VAT is such an “efficient” revenue source, governments which impose the tax tend to rapidly grow in size. Even if the DBCFT isn’t forced by the WTO into becoming a VAT, it poses the same problem going forward. Republicans can trade lower rates for it today, but they can’t prevent a future Congress from raising those rates right back up. Its potential as a revenue machine is simply too tantalizing for politicians to resist.
Competitive incentives that keep politicians in check are also in jeopardy. Before finding its way into congressional tax reform plans, the DBCFT gained popularity among left-leaning academics. Chief among the features they find admire is that insulation it provides for politicians from the pressures of international tax competition.
Right now, individuals and companies which object to excessive tax rates can relocate to jurisdictions with more competitive regimes. This imposes a certain amount of fiscal discipline on politicians who typically would prefer to have none. But there is no escaping the DBCFT no matter how bad it gets without losing access to the U.S. market. Politicians could hike its rates much higher—which get passed on to consumers—without their tax base fleeing. And if they can do it, you know they will.
A comprehensive package of pro-growth tax reforms would go a long way toward putting the economy on the right track. It would also ease the burdens on the millions of Americans feeling squeezed financially. But Republicans should be careful not to include a trojan horse for bigger government that would make it all too easy for the next Congress to undo their hard work.
Andrew F. Quinlan is the co-founder and president of the Center for Freedom and Prosperity (@cfandp).