VAT: The Nightmare Tax Gets Proposed, Again
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.
Nice, well laid out and easy to understand. Thank you!
I can hardly wait for the boom times to come
Now I understand; when I asked my brother about the great social safety net, thriving shops, low crime, quick medical, and clean cities of Germany and Scandanavia (as I keep hearing on America Left radio shows), he said, “Are you kidding? Half of Europe is black market”
Actually, it’s a good idea. Not because it’s “fair” but because it diversifies the tax base. The problem with relying too heavily on income tax is that it discourages people from working harder. Reduce income taxes and shift them to consumption and there’s extra incentive to earn more money.
Argue about reducing tax, that’s fine. But that’s a different question to designing a tax system that better rewards effort.
The product of successful effort should be taxed, because that is what available in the economy to be taxed. Don’t imagine spending taxes don’t have the same distortionary effect as income taxes. Where will all that unspent and untaxed income go that will be productive?
Ask China is capital investment can be a bubble.
“Where will all that unspent and untaxed income go that will be productive?”
How about savings and investments?
Proposals for some sort of consumption tax have appeal for conservatives for reasons we know well, and with their help may actually come to pass someday. Doubtless when one does there will be some sort of “deal” to lower income tax rates at the same time.
But it will be an illusion. Does anyone remember the famous tax deal of 1986? Lowering rates in exchange for doing away with many deductions, for a revenue-neutral simplification of the tax code sounded pretty good, even if we had to wait three years until 1988 for the lower rates.
However, by that time Ronald Reagan had gone back to California and George H.W. Bush had been elected President in no small part on his “Read my lips, no new taxes” pledge. Immediately as the new administration began George Mitchell and the Senate Democrats began to hammer away at that pledge, and soon enough they were successful. Though the increases in rates were small at first, eventually when Bill Clinton passed his tax increase in 1993, the advertized top federal rate hit 39.6 percent, really about 42 percent with all the phase out and recapture gimmicks in the tax bill.
So in the space of maybe 5 years we came a complete circle, but when we arrived back at the start, we were without the deductions we had before.
Mark my words, if there is a deal to introduce a VAT or anything similar in exchange for lowering other taxes, especially the income tax, ten years will not pass before it will be a shambles, with income tax rates as high as before and the VAT climbing toward the 15 -20 percent range.
Why am I so sure of this? In addition to the proclivity of the Congress to grab all the money it can find and spend even more, there is another more powerful reason. One of the Democrats’ core beliefs is that tax policy ought to be used to redistribute income. The progressive income tax has been their primary tool to accomplish redistribution for close to a century now. The party which even now is clamoring for an increase in the top rates so the rich will pay their “fair share” will not agree to a deal lowering those rates unless it is a ploy to introduce the VAT and then do as they please with income tax rates again. In the end we will have both taxes pushed as high as the public will tolerate and another 10 per cent or so of GNP will be gobbled up by the government.
That is not the only argument against the introduction of a VAT in this country, but in my mind it is the most compelling. They fooled us once, and it rests upon their shoulders for having reneged on the deal.
Who will bear the blame if they fool us twice?
I don’t know of anyone who is stupid enough to fall for that. We need to REPLACE and OUTLAW the income tax via Constitutional amendment.
Adding YAT (Yet Another Tax) would be suicide, no matter what promises are made.
You may as well say we need Leprechaun’s to give us all pots of gold for the chance there is of a constitutional amendment outlawing income tax. Politicians are too dependent on the money of the producers to buy votes from the non-producing. You may as well just say you want to return voting rights to only land owning white males.
Yep. To hell with roads, ports, a military etc. Or … have a bake sale!
Actually, it’s bad, very bad, for several reasons:
1. It hides most of the tax. Like all sales taxes, eventually the retail customer pays all of it, but the VAT hides a LOT of government revenue in the purchase price.
2. It hides the actual tax rate. The VAT is applied every time the goods change hands. So, the government gets away with talking about their LOW tax rate of, say, 10%, but the effective rate might be closer to 40 or 50%. In other words, the VAT lies, inherently. Like Bill Clinton, it can’t ever do anything else.
3. It sucks resources out of the economy as described above, AND in terms of productive time and effort being subverted into this byzantine nightmare of an accounting system (like the income tax does).
Your basic idea is sound, but you have not considered how the VAT actually plays out.
What we need is ONE retail sales tax. No corporate taxes, no income taxes. ALL taxes to be raised by one VERY simple, VERY visible, NON-camoflaged sales tax.
Only then will we see what we are TRULY paying. Once we do, the anger will boil over.
As long as we hide the true cost of our leviathan government by VATs and corporate taxes and income taxes, people will not wake up to just how much we are paying for this monster.
“The VAT is applied every time the goods change hands”
That depends entirely on how it’s designed. What you’re describing is just a transaction tax. Australia has a GST, which imposes a 10% tax on all purchases of goods or services, but if you’re a business then you claim those back at the end of each month – so only a final consumer actually ends up out of pocket.
A simple transaction tax ends up disproportionately benefiting vertically-integrated companies, who can avoid those external transactions. That ends up being less efficient and discourages competition. It’s a bad design.
Your: “That depends entirely on how it’s designed.”, is blithely premised upon honesty in governance, . . . which, . . . any sensible person would not give a bent kopeck for.
But the main thing which your thrusts are so very right about (at least, the light in them which I see) is that, there are–or will be–just a whole lot of tax collectors and other governmental VAT administrators and officers who have families too, and they have to be provided for in some way; and no one would wish to see them put to the necessity of applying for food stamps or scrounging the various community chest supplies at various Churches and so forth, . . .
“As long as we hide the true cost of our leviathan government by VATs and corporate taxes and income taxes, people will not wake up to just how much we are paying for this monster..”
You mean US governments don’t publish their budget figures? You actually don’t know how much tax they’re collecting? I’d suggest doing something about that.
“ALL taxes to be raised by one VERY simple, VERY visible, NON-camoflaged sales tax.”
That’s just a bad idea. For the same reason relying entirely on income tax is a bad idea. A broader tax base (collecting the same amount of tax) can be less discouraging to productive economic activity.
Right, so very right; and similarly, every instance of term limits is and has been a bad idea because, an election itself, is the only necessary term limit, . . . why can’t the Am ppl get that into their thick heads?
Taxation issues are not just about numbers. They are VERY MUCH about human psychology, as well.
Budget figures are available, but very few people look at them.
When taxes are hidden from the average Joe, he doesn’t care about them. He doesn’t get angry about them. Slap a tax on a corporation, and that gets rolled into the price of goods and services. Average Joe pays those taxes, though he doesn’t know it, so he has no motivation to change it. He just grumbles about high prices while he cheers taxing that evil greedy corporation.
Take all those hidden taxes (and the VAT is the worst hidden tax of them all), and shove them in Joe’s face every time he makes a purchase, and you will see the kind of anger that will bring fundamental change.
The motive for a VAT is exactly that – it’s a way to hide more taxes so that Joe won’t get angry and demand an end to profligate spending. It’s a soporific.
“A broader tax base (collecting the same amount of tax) can be less discouraging to productive economic activity.”
There is nothing more discouraging to productive economic activity than runaway government spending, and the inflation that brings.
Until Joe understands just how much he’s paying for all this, that runaway spending will continue.
Oh yes, we are at fault here? – Begging understanding for repeating this
IT is not the TAXES – It is the SPENDING OF GOVERNMENT-Federal-State-Local
No Matter what they have – They will spend that and still spend future $$$$$.
They have to have some way to get re-elected. Buying votes is a time tested
method. Just ask them – and they will of course – say not – but they will
have their office send you a letter – (we pay for all business)and then engage
a study to see if this could possibly be true – and let’s not forget the pollsters. Ah, I can see it all now – this will become law – Citizens cannot
in any way, question where the tax money is being spent and by whom – WAIT – we can’t find that out now!!!!!!!!!!!!!!! Oh MY – OH My -What will we do? VOTE?
““Are you kidding? Half of Europe is black market””
I think you’ll find there’s a remarkable correspondence between the parts of europe where that’s true and the countries now looking for bailouts.
Any kind of excessive government taxation on consumer goods favors black marketing. Good examples are cigarettes and booze; or Canadian Viagra. A black market economy would evolve as a result of VAT.
Er … ALL taxation favors a black market. Income tax favors the cash economy as well.
Yep.
But the more complex the taxation system, the easier it is to game the system, and thus shift the tax burden to someone else.
The simpler the tax, the more difficult it is for the cheats, and the less incentive there is for cheating, all other things being equal. (Obviously, a complex system that taxes at 2% will be cheated less than a simple system that taxes at 60%.)
The VAT is a complex system, and more susceptible to manipulation on the government end, and more susceptible to cheating on the citizen end, than a simple retail sales tax.
Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Ronald Reagan
Megaphone to your Congressperson’s ear: NO TAXES! STOP SPENDING! TAKE YOUR BOOTS OFF OUR NECKS and LEAVE US THE HELL ALONE!
We have a lot more housecleaning to do in D.C. before any great turnaround can occur. My Senator in Michigan believes that our rights come from the government, not nature’s God, and she will decide what our rights are and provide them for us. There are far too many of these scofflaws, and we must expel them all before they destroy this republic.
There are far too many citizens that believe thier rights come from the government as well, sadly.
Those “citizens” usually have a milk mustache from suckling the government teat.
Let’s tax advertising, including political advertising — I want less of it. Information about the good stuff (and good politicians) will get around quickly by word of mouth over the internet.
A VAT tax would really mean the end of our economy. You know very well that, in Washington, all they would do is ADD the VAT tax ON TOP of all the taxes you pay now. And for the poor, this would mean a lot of money they would have to shell out each week just to survive. Because, guess what? The poor BUY stuff too and it’s the same stuff the rich people buy, like food, clothing, cars, just about anything you can put a price tag on will be taxed to death. But what you don’t see are all of the other taxes people will also have to pay ON TOP OF the VAT tax. State taxes, city taxes (in New York City that’s about 8%), and local real estate taxes in every town in the country will still be around, added to a Federal Incom Tax that will probably remain unchanged. Add to that all of the taxes places on gasoline, and you’ll have some really happy campers paying a lot of taxes on a yearly basis.
And yet, you still are not hearing the Democrats EVER suggesting to cut and reduce the size of our government to fit the revenues it receives. Never. And THAT is what makes them so loathsome and hateful. It’s always take and take, and never cut and save. Never. And THAT is why we need to vote them out of office in November. Because, if we don’t, the VAT tax will be here before you know it. For everybody, rich or poor.
“And yet, you still are not hearing the Democrats EVER suggesting to cut and reduce the size of our government to fit the revenues it receives.”
You never hear it from Republicans either. Nobody wants to tell Granny “sorry, you didn’t save enough money when you should have, and I’m sorry your kids have mortgages to pay and won’t pony up for your bill. Its time to leave the hospital, go home and die.”
“Its time to leave the hospital, go home and die”. Wait until “Granny” finds that out under Obamacare.
We cannot tell Granny that. It would be, not merely unjust, but evil. She has been promised that “safety net”, and we may not yank it out from under her.
We MUST tell that to Grannie’s grandchildren. The message must be, “This was a stupid and wrong idea. It cannot work, and should not be expected. We have a huge debt to pay for our past stupidity. It must be paid, and you will pay it because there is no other choice. But we stop this nonsense here and now. YOU will not have a safety net. YOU will have to support yourself in your old age. YOU will have to decide how to to that. What WE will do is to make sure we stop spending and spending and spending so that the economy can provide YOU with all the opportunity you can handle. What you do with that opportunity is your business.”
Or as Alan Keyes has put it, “We have to keep the promise we have made, but we have to stop making the promise.”
Can we stop giving illegal aliens free health care? Can we stop funding rediculous “scientific” studies and allow studies to be deemed important by the alumni and not the federal government? How many redundant social programs are there? There is so much waste that can be cut, but you fall right back to the oldest play in the Big Government Democrat playbook, “Granny’s gonna die on 2. Break.”
A VAT reduces the amount of your disposable income by the amount of the tax. Therefore, the poor will be much worse off than previously; the wealthy will be somewhat worse off since they have both more disposable income and will invest some of it. Investments are not subject to VAT.
The poor? Yeah but, a lot of families whose breadwinner(s) will be in staff at the offices of the new departments will be being provided for; so, . . . yeah, it’s too bad someone has to suffer a little bit but, at least someone can benefit by it, . . .
We probably all agree that the Govt. needs revenue. Well here is a simple tax that raises revenue in a progressive manner, is easily implemented and managed, is paid by everybody and encourages saving.
It also acts as a very effective import tariff. Currently US exports (such as they are) are exposed to VAT in just about market worldwide, while imports into the US are not taxed except at the State sales tax level.
I don’t like taxes any more than all of you but we have to face a reality; the Federal Govt. borrows 40% of every dollar it spends and we have an insurmountable level of accumulated debt, we need to raise revenue and cut spending, and encourage business in the US. If we implemented 20% VAT, reduced corporate tax to zero and capped income tax at 10% the economy would come back roaring.
Of course as Libertyship points out, the tendency in Washington is always to spend, never to cut. We as a people have to fix that.
The VAT is rebated either to the manufacturer or the the last seller when a product is exported from Europe. That restores competitively with foreign products when the European product is imported by another, non-European, country. On the other hand, imposing a VAT on our products when they enter the European market is a wash as far as competition is concerned. Like products will be subject to the same VAT, regardless of origin. The European importer [who usually is not the U.S. manufacturer] pays the VAT and then passes it down the consumption chain.
“We probably all agree that the Govt. needs revenue”
H’LL NO WE DON’T AGREE !!
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Then you are a silly child, with no understanding of the adult world, and no understanding of the principles of the Founding Fathers.
Yes, a certain amount of government IS a necessity, and that costs money. THAT is why the federal Constitution and every State constitution (many of which were written by those same Founding Fathers) provides for the government to raise money by tariffs and taxes.
There is nothing wrong in principle with government OR taxes.
The problem is that we have allowed our federal government to act lawlessly.
The VAT system is a socialist’s dream tax. There is no tax which is more damaging to a free economy, or more easily manipulated.
There is NOTHING good about a VAT.
“Nothing good about a VAT”? Well, what about all of families whose breadwinner(s) will be in staff at all the offices of the new departments, and providing for their families–isn’t that worth something?
Sure, it’s too bad that, the nation has to suffer somewhat but, at least someone can benefit by it, . . .
Another little secret of the VAT Tax is that it requires a hoard of bureaucrats to administer the system. So it creates another group of very, very loyal voters.
Yes, the government needs revenue; not tax increases. How to get more revenue without raising taxes? Get the economy moving again. Release the potential.
Drill for oil and natural gas. Mine for minerals (especially rate earth ones) and coal. Harvest trees; they can replanted endlessly (why let them burn up in forest fires and take your house in the process?). Put a dagger through the Depts. of Energy, Agriculture, Labor, Education, and the EPA. Build refineries.
Build the Keystone pipeline. Slash other bureaucracies and replace them with free market solutions.
End all welfare programs in place; let no one else sign up for any welfare program. Then slowly make the able bodied go to work. End illegal immigration; make all employers use E-Verify. Slowly make the illegals go home as we can’t afford them. End Obamacare in its entirety. Reform the entitlement programs and slowly move Social Security and Medicare to self-managed accounts.
VAT is another tax added to our present taxes. I lived in Europe years ago and was aware that Europeans pay very high income taxes plus the vat tax. The Americans are being duped by corrupt politicians who try to convince us that the vat will be fair and the rich will pay more. What a joke. This is another scheme coming from the Obama regime to rip off more and more money from the productive sector and hand it out to the non productive sector in exchange for democrat votes. If we really want tax reform and fairness we should abolish the tax exempt foundations where billionaires like Buffet and Gates poor billions of tax free money and keep it under their control The Kennedy family one of the riches in the US have a foundation which keeps their progeny in high paying ngo executive jobs for generations. Let us abolish the charity tax, if you want to give to charity than use your own money. Let churches break the chains that they have forged on themselves with their tax exemptions and really live the lives that Christ gave us and stop acting as the running dogs for the corrupt satanic American State.
payroll taxes to encourage people to buy more things, stimulating the economy, then we put in a VAT-type of sales tax to increase the price of everything, which will discourage people from buying things …
With all the debates, why has not one moderator asked the candidates where they stand on the VAT? Both Newt and Mitt have entertained the idea of a VAT, what about Santorum? RP is against taxes. The fact Santorum has not brought this up worries me, either he also considers it or is too weak a strategist to use this as a way to force Romney into stating a position during the primaries. I wish someone at one of these campaign events would at least ask the question, the media is too busy reporting polls as news instead of asking important questions and informing voters of candidates positions on issues.
I think the most likely reason is that it’s just not on his radar.
One thing the VAT does, as the author points toward, is distort the free market by driving out the small competitors. It’s another regulatory burden that the large corporations can manage but that destroys the small fry. Ultimately, it’s terrible for the consumer.
An example: In the 90′s I spent a good bit of time in London and I’d see items in store fronts that seemed expensive but I wasn’t really sure until I came across the Iomega Zip Drive (kids, ask your parents). At the time you could buy the drive anywhere in the US for $100, it was 100 pounds in London… which made it $167 with the currency exchange rate. The Zip Drive was largely a commodity, meaning it should cost the same everywhere except for differences in transportation costs, but it was substantially more than in the US because of the VAT and the lack of competition. Anywhere you see a VAT you see the consumer getting hosed.
You and I must have lived in London at the same time. I lived there from early 97 to late 2000. It was my experience there that made me antagonistic to socialized medicine and a VAT.
VAT is the ultimate BIG GOVERNMENT evil. It taxes everyone, every thing at every level. Once, twice, three times . . . on and on and on. Consider it a “breathing” tax. You consume air, you pay for it. For the rest of your life.
We should be taxing consumption rather than investment.
I would like to see a consumption tax in place of capital gains tax.
It shouldn’t be structured as a VAT though. Rather, it should be a simple national sales tax.
One more point. It’s about time that we conservatives rid ourselves of this failed Grover Norquist “starve the beast” theory. Cutting taxes and cutting taxes and cutting taxes has NOT forced the Congress to cut spending. Instead, spending has risen anyway and we’ve ended up with huge deficits and a mounting national debt.
This is not the 1980s anymore, and what worked for Reagan won’t work today. With the debt approaching frightening levels now, I care much more about the deficits than I do about cutting taxes for the sake of cutting taxes. A national sales tax would raise enough revenue that we could drastically cut the capital gains tax and other taxes that discourage investment, while still enabling us to balance the budget.
And it would teach young people a lesson that this country really does care more about investing for the long term than about conspicuous consumption.
“With the debt approaching frightening levels now, I care much more about the deficits than I do about cutting taxes for the sake of cutting taxes.”
It would also reinforce the idea in government that all they need to do is deficit-spend until the public (you) cries “uncle” and gives Congress the authority (again) to raise taxes. Where does it end? You are agreeing to government over-spending in their blatant attempt to “justifiably” increase taxation, i.e., justified to reduce the deficit. You should rethink that kind of philosophy. That’s nothing more than an approval for future deficit spending.
Revenues are only one part of the deficit equation. The other part is spending. History has shown that any increases in revenue will be more than exceeded by increases in spending. The Reagan tax rate reductions of the 1980s stimulated the economy which in turn generated far more revenue. However, spending increased by about $1.40 for each dollar of increased revenue. So long as that’s the case, we’ll never get rid of the deficits much less the debt.
Government can not be a net producer of jobs. The best thing government can do is to stimulate the economy. Extra spending like Obama’s $800 billion slush fund did little to stimulate the economy. The things that are proven to work are tax rate reductions and reductions of the regulatory burden on business. A VAT will take money out of the general economy and therefore won’t help anyone but the spenders and the army of bureaucrats necessary to administer the program.
Hah! Liberals are screwed on this one no matter what. If they don’t do it they don’t get the money they need to further mask their bankrupting America. If they DO do it they will be taxing the 50% of Robin Hood’s moral men who don’t currently pay ANY Fed tax. Let’s call this “Obama’s Choice”; which member of the Rainbow Coalition to throw to the wolves; the social programs or the individuals. Life is so hard when you don’t have the common sense or brains god gave a raccoon. The naked truth is that because of mismanagement, taxes MUST be raised in America or it’ll become insolvent. Thanks guv. Just keep paying morons to be morons and keep robbing the productive who don’t need to be stuck with a cattle prod just to show up for school which on their level is a kind of a Rubik’s Cube to figure out.
Look, first have a constitutional amendment that limits the individual income tax to only times of war (declared war by congress) with a limit of 10 years. Otherwise the federal government mostly taxes excise (alcohol, tobacco, pot, guns) or uses a modified sales tax (VAT could fall under that).
I would allow a business tax but not a personal income tax.
America should have a fun raiser !!! It will Have Obama in a Booth where you get to Punch or kick him for a dollar a Minute.. We could actually Balance the Bugdet and create a surplus in Less than a WEEK !!!!
Shocked!Shocked I tell you! On PJ Media, respondents to theis article, become apologist for a vat tax, a tax that is hidden thus making it easier for government to avoid the wrath of voters.
Shame! What ever became of, “cut spending now”? The government is self serving and unconcerned about you. Don’t you get it? It is the leviathan. It is eating us alive.
You so called “conservatives” that apologize for a VAT are no different than weak knee’d liberals afraid to reduce the size of the government for fear, feasr of your wards, fear of losing your job.
Disgusting!!
I think it is the least worst tax out there. Bruce Bartlett, true-blue conservative, has just written a book in support of it, and summarizes the reasons for his support here at Forbes:
http://www.forbes.com/2009/10/22/republicans-value-added-tax-opinions-columnists-bruce-bartlett.html
Money quote: “In my opinion, opposing a VAT means implicitly supporting our current tax system, which imposes a dead-weight cost equal to a third or more of revenue raised–at least 5% of GDP–according to various studies. This is insane. The idea that raising taxes in the most economically painful way possible will hold down the level of taxation and the size of government is obviously false.”
I mainly support it because it encourages EXPORTS. We need to make stuff again in America, stop being just a nation of consumers, investors and money-lenders. I would eliminate all corporate taxes and all payroll taxes in exchange for a VAT.
I would eliminate all corporate taxes and all payroll taxes in exchange for a VAT.
That’s very nice of you. However, your friendly neighborhood politicians will not be so inclined.
VAT = “protection money” that people from the “hood” collect.
Thugs are the same no matter what office they inhabit.
Our gov’t has become a vampiric blood sucker to further schemes few care about or are responsible for. I am a victim with only so many red blood cells. A small percentage of Americans take an awful lot off the table but political correctness dictates we continue throwing money down a black hole. How many of the millions of illegal aliens are paying taxes; how many are sending money home that would otherwise have been circulated here? How many of them are criminals either robbing people or the law enforcement system: how many use social services for free and con the gov’t out of welfare and food stamps? Getting rid of those vampires would pay for an aircraft carrier group for a decade.
One major probem with VAT, and only alluded to here, is that by the time a given item has passed through several links in the value chain, the nominal tax rate has multiplied, being collected at every link in the chain. This means that, having passed through ten or so links between raw material in the ground and packaged finished goods on the shop shelf, that percentage has been paid ten times, each time on the goods PLUS the previously accumulated VAT. Compound interest is one of the major scourges of western economy (fiat currency being by far the worst, income tax being its near equal). Why volunteer to pay this sort of confiscation?
No, the answer is NOT a VAT. Europe proves that. What started out as a single digit rate has, great surprise, multiplied.
Ron Paul, of all the current candidates, has the ONLY solution that makes any sense. His plan to turn our government financial mess around in four years should work.. IF he can surmount certain resistance and carry it off. END the worst offenders at FedGov level that eat out our substance daily… not only consuming vast amounts of our capital on their own, but adding billions to the cost of living and doing business in this land. The answer can never again be more taxes, or even changing taxes to be “more fair”. What part of working more than half the year to feed the monster in DC is “fair”? Take the axe to the monster, then to his hideout.
Well spoken, Beowulf. I’m with you. You are right. Proposals for VAT are just an attempt by politicians to steal more money to buy more votes. Why would we need to raise revenues? Because millions are out of work, and not paying taxes, because of a hostile and parasitic government. What’s governments answer? More parasitic, life force draining, economy plunging, taxation. Why not just propose another gas tax? I mean between federal, local, and state governments, they only take .46 cents for each dollar of gas you buy, all the while screeching about the .09 cents of oil company profit. No, as the person above said, there is no reason for more taxes; there IS a need to stop wasting our tax dollars on bloated bureaucracy in the process of giving it to people who pay no taxes. How can anyone think that is a recipe for success? Value added tax is such an incendiary idea when you think about it.
My Italian friend Raphaella once joked with me that in Italy they’ll tax the shadow cast by your cart’s umbrella. I think she was serious, actually. This is where we are headed in the United States.
The way I see it, is that what the author describes in Israel is no different than what we have here, IE, politicians not economist tried to figure out how to best augment their constituent’s purses instead of thinking it through. There are much better ways of implementing a VAT. Think it through, it is not that difficult if you don’t listen to business whining about what they have to do. We already collect FED and State taxes in business through payroll deductions. VATs should be no different. Now business would not be responsible to collect those particular taxes, just the VAT on the sales of their finished products.
Also you don’t allow for a VAT on every step from raw materials to finished product. Remember that all finished products are sold to someone or something, (like a corporation or a government). It doesn’t make a difference if it is oil, or a tank, a hairbrush or a suit from China.
VATs should only be collected on that final transaction. Figuring out how much VAT should be applied to any particular product should also be an easy formulation that business can use that satisfies regulations enacted for that purpose. IE; Raw material cost + labor, overhead, profit margins, etc. etc.
All the whining comes in when someone doesn’t feel they can get a fair share and wants special treatment. Kind of like it is now. Hopefully VATs would solve that revolving crony capitalism !!!
Actually, unless accounting methods have changed since I was an accountant, we are in effect paying a value added tax already. When a manufacturer buys a raw material he pays taxes on that purchase; when he produces the end product and sells it to a distributor he will add sales tax on that sale. When the distributor sells it to the seller, he adds his sales tax to the cost. Then the seller adds the sales tax from his purchase, plus the tax he needs to collect and passes it on to you the consumer. Every product sold on the market includes a value added tax from the originator to the purchaser.
@ Brenda
That depends. Anything I buy in-state as a constituent material for manufacture of a product that I sell, I buy using a tax-exempt resale certificate granted me by the state.
Um, no. A manufacture does not pay sales tax on raw materials. He does not charge sales tax when he sells it to the distributor. When the distributor sells it to the retailer he does not charge a sales tax.
You HAVE described a VAT. What you have NOT described is how business is done in the United States.
It is very important to distinguish between a VAT and the FairTax. The FairTax nothing like the VAT, and all of the studies concerning the FairTax that did not have very favorable findings altered some of the fundamental aspects of the legislation to make it more like a VAT. The FairTax is a tax on consumption, but it has none of the disadvantages discussed in this article. The FairTax is a tax ONLY at the point of final consumption, with NO exclusions. Only new goods and services would be taxed. Nothing would be taxed twice. Read more at FairTax.org or buy one of the books – they are quick reads.
Sorry but your FAIR TAX would require a police state in order to prevent massive tax evasion, particularly when you raise it above the levels necessary to replace the income tax. Or perhaps the massive tax evasion that would exist under FAIR is a feature rather than a shortcoming of the system? For some libertarians, I imagine that it would be.
http://qando.net/details.aspx?Entry=2443
VAT on the other hand actually has built in incentives for compliance (see bottom of page six of this report):
http://www.imf.org/external/pubs/ft/wp/2007/wp0731.pdf
VAT and Europe’s Guild System are a better analogy…both seriously curtail any and all economic activity.
One example…warehouses. Storage of goods for resale becomes a nightmare of forms, paperwork, new laws, additional tax brackets, percentages, reams and reams of rules and regulations yet unheard of and even unimagined. New federal, local, state and municipal “revenue” agencies would crop, paralleling even those already in place.
Plus, Europe has, as of 2010 adopted a new, different form of accounting. VAT defies logic…instead of trying to improve supply chain management, VAT would so hamper it to bringing USA’e capitalistic system of commerce to it’s knees.
For a complete review of VAT in practice, consult with Wal-Mart, Makro, Carrefour (drove this last to loose market share). Say, no to VAT…no matter what We The Elite People of culture of corruption in Washington DC paint VAT as.
Freedom, not chains. God Bless America. Amen.
dude, where’s my comment?
Mark v: 2. The VAT is applied every time the goods change hands. So, the government gets away with talking about their LOW tax rate of, say, 10%, but the effective rate might be closer to 40 or 50%.”
Um, no.
A buys wood, glue etc. at 10$ – pays 11$ ($10 + 10% VAT)
A makes chair from wood, etc. and sells to B
B buys chair at 50$ – pays 55$ ($50 + 10% VAT)
A pays government $5 – 1$ already paid (in purchase of wood) i.e. 4$
(or 10% of VALUE ADDED – i.e. $40)
B sells chair in shop to C
C pays $110 for chair ($100 + 10%)
B pays government $10 – $5 already paid i.e. $5
(or 10% of VALUE ADDED – i.e. $50)
Government has received in total $10 i.e. 10% of final sales value, however, at EACH PRICE RAISE, the gov received its percentage, so it gets the money whether the goods are paid for or not.
This is why it is called VALUE ADDED TAX and not SALES TAX, you pay the tax on the added value.
Without false modesty, I brought out essentially these points about VAT hitting working capital in GST not a consumption tax, and some variant tax options, an article for News Weekly, back in August, 1998 when Australia was about to introduce a VAT (under the name GST).
Here in Australia we have a very useful VAT (called GST) which does not have the faults listed in the article.
The tax is useful because without it taxes on income would be huge, and because it is levied by the Feds and received by the states, so there is no competetive tax cutting by the states. The only big exemptions are fresh food and medical services and goods (eg pharmaceutical drugs).
The taxpayer can elect to pay on a cash basis, so there is no lending to the taxman. Tax received (on your cash sales) minus tax gone out (on your cash expenses) equals your tax debt in any given period. It really is a tax on value added, ie on cash profit. It is not a tax on sales or consumption.
We are lucky to have this tax. Before it came along the states were in a bind. They stuggled to pay their expenses because of the tax competion with each other.
Good luck to the USA. I really hope your governments learn to live within their means. I do not recommend any new tax when the economy is going into recession (now) or just coming out of a recession, but in the future a VAT could be useful.
Yes, Australian GST is a tax on working capital much as the article indicates happens elsewhere. It is just that this aspect is embedded in the payments to suppliers and isn’t obvious. The only firms that escape this are those that pay their suppliers after their own customers pay them – those that don’t tie up their own funds in working capital – but that is merely shifting the burden on working capital to others who still pay tax on it. And GST can hit fixed capital in a similar way too, unless adjustments are made. See the link I provided in the comment just before yours to see how this works out and the sort of adjustments that would fix the problem. I am not aware of any attempts by the ATO (Australian Tax Organisation) to reverse their tax prepayment philosophy (that also shows up in provisional tax), which is basically what would be needed.
Yes, it’s very useful, because it fools people into thinking their tax rates are lkower than they really are.
That is exactly why statists love the VAT.
I spent a little time in New Mexico building a restaurant. The way they run their sales tax, is that you can avoid sales tax if your purchase is not an end sales. I had never saw this before.
I was a super and the purchases made by the subs were not subject to a sales tax since they would be charging the owner/builder the sales tax. This is the only type of tax on products I would agree to if the federal government wanted to implement a national consumption tax.
With one more caveat, the income tax would be eliminated.
It is time to create a simplistic tax system that applies to everyone and cannot be manipulated. Time to get everyone in the game and everyone should be able to see the total effective tax rate up front.
That’s SOP for a retail sales tax. I don’t know of a state in the Union that does it differently. If they did, it would be a VAT.
One other thing about this VAT that other countries have. Think about how the VAT in other countries supplies their countries with a tax when we sell there, yet when they sell their products here, no such tax is collected. To me it sounds like a way around the fair trade agreements.
No new taxes. Period. Cut spending, and use a chain saw, not a scalpel. Abolish the Department of Education and HHS. Make a balanced budget mandatory for DC and earn a primary surplus for the next ten years so we can pay down the debt. Use e-verify to run the illegals and open up jobs for displaced government workers. Make Puerto Rico independent on a 30 day notice.
Do those things and we’ll have a screamingly growing economy and record levels of tax income.
No way. That would be HUGELY disruptive to a lot of innocent people.
There should be at least a year’s notice, preferably 2.
Norman Ture, one of the godfathers of supply-side economics, and Murray Weidenbaum, chairman of the Council of Economic Advisers under Ronald Reagan were some of the first to talk about a VAT. This is not Obama’s idea to make us more like Europe. This is a good conservative idea that, like most good ideas Europe has bureaucratized into worthlessness.
No hidden tax is a good idea, no matter how many luminaries say it is.
I remember when Linda Smith was a Representative from Washington State to Washington, DC, after 1994.
The topic of taxation was being discussed, and I mentioned what happened when Canada introduced the Goods and Services Tax, which taxes consumption like the V.A.T. The underground economy in Ontario and Quebec, in the construction trade, boomed. Part of it was, income tax is still being collected, and people object to a plethora of taxes.
I am pretty sure the Fraser Institute in Vancouver, BC, still has the paperwork that supports that observation.
The more things change,….
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