In response to my recent article discussing the inappropriateness of value-added taxation in the United States, one reader has directed me to an article written by David Ignatius, which raises a compelling counter-argument. In essence, Mr. Ignatius argues that the U.S. is comparable to Greece in the sense that: (1) like Greece, the U.S. has spent more money than it has earned and borrowed to cover the resulting deficit for many years; and (2) like Greece (pre-EU/IMF bailout), the U.S. is one of the only nations without a system of a value-added taxation in place. Accordingly, he suggests that, unless the U.S. implements a value-added tax (VAT), it will experience a large-scale financial meltdown similar to the recent Greek fiscal crisis.
While I understand the logic of Mr. Ignatius' argument, I respectfully believe that his reasoning is flawed on 2 levels:
(1) A 21% VAT did not save the Greek government. To adopt a solution that failed for Greece in an effort to prevent what happened in Greece is counterintuitive.
As far as Greece's VAT goes, it should be noted that it was probably involuntary. The International Monetary Fund (IMF) routinely conditions loans on implementation of a VAT. In addition, European Union (EU) law requires that every member state adopt a VAT that conforms to EU standards. Thus, it is likely that Greece's enactment of a VAT was motivated by its need for financial bailout by the EU and the IMF.
(2) The root of the Greek fiscal crisis was rampant tax evasion, not proliferate government spending. Indeed, international comparisons reveal that tax evasion in Greece is among the worst in the developed world.
The high levels of tax evasion in Greece are largely attributable to the structure of its economy. Unlike the corporate-dominated landscape of American business, the Greek economy is comprised primarily of "mom and pop" operations, which can easily avoid reporting income. Thus, the conditions for underground business activity and tax evasion are optimal in Greece. The structural distinctions between the American and Greek economies in this sense really preclude any meaningful analogy of the U.S. economy to the Greek economy.