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VAT: The Nightmare Tax Gets Proposed, Again

Former Senator Hollings floats the idea, which Obama has considered before.

by
Brian London

Bio

February 28, 2012 - 12:01 am
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Hopefully, we have pre-sold much of a shipment so within a few days the goods are in the hands of dealers (I sell a little to end users, but mostly I sell to people who sell on). Let’s say I sell the whole shipment to one customer. If I sell on for $130,000, I have to add 16% on top, so I invoice $150,800. I’ve paid $16,000 to the government and now I’m waiting for my customer to pay $130,000 for me, and $20,800 for the government.

And here’s the sticking point: I have to account for the VAT on the day of invoice, which means if I give the customer 60 days to pay, I’m out of pocket by $16,000 for 60 days.

In effect, I’ve lent my money to the government on an interest-free loan. When (or if) my customer pays I will have collected $4,800 for the government — and I had to do all the administration. It’s even worse if the goods are not pre-sold, because I end up loaning the money to the government until the stocks are sold.

Once a month, my company’s bookkeeper has to figure out the previous month’s incomings (invoices written but not necessarily paid to customers) and outgoings (VAT payments at the ports and other local purchases). This report is submitted and any payment necessary to balance the books is made. Sometimes I am required to appear in person at the VAT office to show particularly large or unusual invoices, not one of my favorite business tasks.

Retailers have it the other way around: they end up being huge net holders of VAT because they buy and pay VAT to their suppliers, usually on credit. They sell for cash including VAT, which they can hold for up to four weeks until they submit their next monthly VAT report and pay to the government.

What about, say, a small manufacturing company started by an entrepreneur with a clever idea to make a better widget than GE? He has to pay VAT on any equipment he buys, and he has to pay VAT on any goods and services he buys along the way. He can claim it back in a monthly cycle as he goes along, but he’ll pretty quickly find that part of any capital he raises will be held in trust by the government instead of working for him. And that is before he makes a dime in profit.

Do you enjoy the process of claiming a federal tax refund today? Would you like to deal with that every single month? And what about audits and loopholes?

The net result, barely mentioned outside of obscure economics texts: businesses give an interest-free loan to the government directly from their working capital and must act as unpaid tax collectors. That is one of the dirty little secrets of what VAT would mean for businesses in the U.S.

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Brian made aliyah (emigrated) from the UK to Israel in 2009. He owns and operates his own import company in Israel with more than 15 employees. For many years Brian co-wrote and hosted the satirical Shire Network News podcast, and has written for a number outlets. Today he most regularly blogs at Israellycool.com about life in Israel, countering Jihad, and occasionally business topics.
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