Beware, the Value-Added Tax
As the administration pushes a value-added tax, while in typical Barackonian fashion claiming they’re not pushing a VAT, I thought it might be prudent to examine exactly what a VAT is.
The VAT is essentially a sales tax, but of a very specific sort.
What happens is every time value is added to a product or service, there is a tax added.
In the case of bread, for example, there is a tax when the wheat is harvested, another when the wheat is sold, another when the wheat is ground into flour, another when the flour is baked, another when the bread is sold to the retailer, and finally one when the bread sold to you.
And this happens on every purchase, whether a good or service.
This value-added tax has been used in Europe for some time and is rather unpopular there. It also has the effect of depressing consumption, as a large tax tends to keep people from buying things.
Now, if this VAT — or a national sales tax, another idea of the administration to fund its spending binge — were to replace the current system of income taxes then amen brother, preach on. However, this is being touted as a way to raise additional income, not as a replacement for the current system which everyone but the Internal Revenue Service hates.
It is usually implemented in a stair-step fashion, and the details vary from country to country. For instance, in the Netherlands non-essential goods and services are taxed at 19 percent while essentials like food are taxed at 6 percent.
Keep in mind that the top marginal tax rate in the Netherlands is just over 50 percent and there is talk of raising it to 60 percent. Sound familiar?
The above account does not accurately explain VAT, for example, VAT in Europe works like this.
First, VAT replaces all other “sales” taxes; second it is an end-user tax not a cascade tax and does not accrue on the cost of manufacture of goods or provision of a service.
Whilst it is applied at all stages where value is added, businesses registered for VAT (this can be by choice or is compulsory above a certain specified revenue value) can recover from the Revenue Service the VAT they pay on ALL inter-business transactions for goods and services in connexion with their own business – so not just VAT paid on components, but such things as desks, chairs, computers, cars, fuel, heating, lighting, accountant’s or legal services, stationery, etc. This is full recovery of the amount paid not an offset against corporation tax.
VAT then has a neutral effect on cost of doing business and indeed for businesses which under the old system could not recover sales taxes, it provides a net drop in costs.
VAT is a national tax in Europe, although it varies between the Member States of the EU. Prices MUST be displayed with VAT included, so irrespective of where you are within a Country or in another Country, what you see on the ticket is what you end up paying. A 15 Euro restaurant meal then costs precisely that, not 15 Euro plus some other tax(es).
On inter-Country sales, VAT is applied and invoiced at the rate of the Country where the goods/services are used, and paid to the receiving Country via the collection system in the originating Country where payment for the goods/service is collected.
It is a very simple tax to apply, understand and collect.
How VAT might be used in the USA is another matter. If it is an additional tax to other sales taxes then this is not how it is intended to work and it is not truly VAT, just a Federal sales tax.
In point of fact, how the VAT is collected in Europe varies from nation nation within the Eurozone. While in some countries the VAT has replaced all other taxes, in others it has not. In the Netherlands, for example, there is the VAT and income taxes as well.
Additionally, the VAT being discussed in the US is not intended to replace anything, but to be in addition to all the other taxes we currently pay.
I stand by my, admittedly, simplified explanation of a VAT. The issue is simply too complex to be completely dissected outside of perhaps writing an entire book. The purpose of this article was merely to give the reader an overview and basic understanding of the VAT.
Worse than you think. VAT collects enough to pay the bureau-rats eventually needed to process it. The incredibly complex cats-cradle of regulations needed to tax some things and not others, some production steps and not others . . . I lived in Europe many years.
It leads to verticalization of industry as the population naturally finds ways to reduce its impact. It leads to lobbyist and government collusions and corruption to influence the regulations which grow like mold.
And when will Americans STOP comparing Euro income taxes to America’s tax situation. We have NINE levels of government and every damn thing in the world is taxed by all of them. Maybe a Euro pays 50% income tax while we pay only 25%, but he pays damn little else. When ALL US taxes are tallied, a family of four pays 55 cents on the dollar by some accounts.
To sum up: the problem is less the tax than the creeping, then accelerating (without limits) statists regulation.
Recipe for collapsing the U.S. economy. Add one cup of stimulus and make sure that 4/5′s go to government agencies and projects. Add two cups of health care reform and be sure that you ration the medical profession pay and the patients care while heaping on more government agencies, and sprinkle with a 5% VAT (just a few percent for starters) which will be added at importation, remember we don’t make much ourselves anymore, at the wholesaler and at the retailer which is really 16.7% VAT total for those of you that aren’t doing the math.
I remember when Linda Smith was a Representative from Washington state, and I mentioned the result of Canada introducing the Goods & Services Tax, which is a consumption tax. Income tax was kept in, so black market activity within the construction trade in Ontario & Quebec increased. She wrote a nice letter in reply, thanking me for my Canadian perspective.
I was visiting a sick relative at the time.
The insidious part is the consumer just sees the product price go up. It is probably what has led to the EU meltdown due to economy shrinkage.
Politicians favor the Value-Added Tax because they would be exempt since they do not add value to anything.
Given that almost half of Americans pay no federal income tax (and it’s mostly middle class folks taking every deduction possible), a VAT isn’t a bad idea. Everyone is forced to contribute to the country’s operating expenses and no one can deduct or itemize their way out of it.
Yes, but not while the income tax still stands, else my generation will be left bankrupt and enslaved in the land our fathers conquered.
What we need is what I have been pushing for since 1998.
The present Gov. revenue is 20% of GDP.
The IRS uses up 75% of all revenue collected to run that burocracy leaving
only 25% of what is collected for the U.S. Governments use.
A 12% flat tax at the point of sale will give the federal Gov. twice as much
revenue and then some.
The IRS can then be downsized by at least 85% the remaining 15% can do the residual collecting and follow up at the point of sale collections which will
be a lot fewer that the whole population.
The additional savings made by the retiring of a lot of eldgeable IRS personal and the laying of all new hires and the ending of all the temp hiring will save three times the federal Governments revenue.
The National debt can be eliminated in short order with all that money being applied to it.
Limit imports to 20% with a 30% tariff on them. our economy will prosper not that of other nations.
Build American sell American, no exceptions. We are 80% of the world economy keep 80% for american producers.
Do not outsource jobs.
People will have more money to spend creating more jobs problem with the economy fixed.
Job shortages fixed.
I can fix everything, no more need for the Federal Income Tax, will be abolished.
With the national debt being payed off the Social Security and Medicare will also be funded.
Vote for me for President of the United States. This is just the tip of the
iceburg. We need a third party to prevent one party having total control.
Victor M. Sienze
Taxes are a neccessary evil. And like a previous poster pointed out, most folks do their level-headed best to find every deduction they can to defray their tax expense. Also we all those people on the fringes like drug dealers, prostitutes and other criminals who pay no federal taxes at all. A flat tax is all well and good except the fringe people still don’t pay taxes. Abolish the 16th amendment and institute a national sales tax, excepting for neccessary goods such as groceries, utilities and gas,( there are already federal and state taxes on petroleum products, about 25% or so on every gallon of gas.). That wouldn’t hurt the middle class or poverty-stricken. Tax the unneccessary items people buy like big screen tvs and computers,Ipads and ipods, cars and boats, ect. A 20% tax on these items would bring in a tremendous amount of revenue and it could be overseen by a very small department.
Worse than you think. VAT collects enough to pay the bureau-rats eventually needed to process it. The incredibly complex cats-cradle of regulations needed to tax some things and not others, some production steps and not others . . . I lived in Europe many years.
VAT taxes raise immense amounts of money in very little time. Since each transaction is subject, governments need not wait for taxpayers to file returns.
They are always levied at very low amounts, or with very limited application, in response to a “national emergency”. In every case, within 20 years, they approach 20%.
Since their increase is roughly 1% per year, one can perform “parlor tricks” in new VAT jurisdictions. Visiting Fiji some years ago, I noted that the restaurant check didn’t appear to total correctly. I was told that I hadn’t applied the 6% VAT. “Oh, yes,” I said, “that was from about five years ago….during that national emergency….” — to which the waitress responded, “yes, that’s right,” while looking puzzled as to how I knew the details of its enactment when I clearly did not know that the tax had been levied.