Are you afraid that the tax system will be changed to VAT, making a Roth a bad deal?

[samclem]

Is there any advantage to VAT over an NST? Other than from the accountant's job security point of view?

VAT just seems so complicated to me, and seems to end the same. Am I missing something? Or is the VAT all about smoke-and-mirrors so the consumer feels that they are not being taxed, only greedy capitalist companies are being taxed?

- ERD50

After reading the link provided by landover it appears one "advantage" of a VAT over a NRST is that, as it is commonly implemented, it is a stealth tariff on foreign imports. So, it will be favored by those who oppose free trade.

While a VAT punishes imports, a NRST (if implemented as outlined in H.R 25/ S.296) would enhance our competitiveness by eliminating the corporate income tax and by eliminating the embedded costs of payroll-related taxes. But the NRST doesn't make any arbitrary distinctions between internally-produced products and externally-produced ones, so it should be more popular with those who favor free trade.

One other difference: The NRST handles the problem of regressivity by providing a "prebate" to all citizens. By doing this, it avoids the need to exclude various types of purchases/goods--it effectively removes all taxation from purchases up to the poverty level. The VAT typically handles the regressivity problem by excluding various types of goods. This turns into a very complicated issues. This article provides a glimpse at things in Britain.
In part:

And so, in the United Kingdom, according to the regulations of Her Majesty's Inland Revenue Service, crackers made from tapioca starch carry no tax; prawn crackers made from cereals do. Frozen yogurt that needs to be thawed before eating is zero rated, frozen yogurt bears the tax. Get it? If you don't, too bad—Her Majesty's tax collectors are not in the habit of offering an explanation for their regulations.
Food for animals creates other problems. If it is "suitable for all breeds" it is taxed, but if "it is held out for sale exclusively for working dogs" it is not, unless, of course, "it is biscuit or meal," in which case it is taxed.
So dog food for "sheepdog breeds" is taxed, but dog food for "working sheep dogs of any breed" is not; food for greyhounds is taxed, food for "racing greyhounds" is not. This may be the only tax in Britain that favors work over leisure.

 

[Gone4Good]

Is there any advantage to VAT over an NST? Other than from the accountant's job security point of view?

I think the only real difference is with a sales tax you have to find out who the final consumer is. If a business buys coffee for its kitchenette it should be taxed. But if it buys coffee to resell then it shouldn't be taxed (otherwise we tax the transaction every time it changes hands, which we don't want). Under a VAT, you only pay tax on the mark-up so you don't care who the end use customer is (and businesses have no ability to avoid the tax by saying they're re-selling when they are not).

 

[ERD50]

VAT too complicated ? What about Income taxes - aren't they also very complicated and very intrusive.

Agreed, what I meant to convey is that VAT seems complicated compared to NST.

Under a VAT, you only pay tax on the mark-up so you don't care who the end use customer is (and businesses have no ability to avoid the tax by saying they're re-selling when they are not).

OK thanks, I was not aware of that distinction. I thought VAT also had to determine if the buyer was a business or end user. So the name is reasonably accurate, it is a tax on the 'value added', so (theoretically), the added value would not be taxed twice, as that cost basis is passed on to the next in the chain. But as samclem points out, there seems to be no limit to the ability of our politicians to over-complicate something.

-ERD50

 

[Gone4Good]

After reading the link provided by landover . . .

These seem like things that could apply to either a NST or the VAT. I don't really see how they specifically apply to one versus the other. With the foreign import tax, you point to a reference where separate treaties reimburse the VAT . . . the same could be done with a NST. And couldn't we "pre-bate" a certain amount of the VAT and tax everything too?

 

[Nords]

Before a VAT is instituted in the USA we will read about all the benefits such as revenue from the underground economy - illegal drugs; prostitution etc.

Nah, as we do now we'll just keep asking if there's a discount for paying cash...

 

[harley]

Nah, as we do now we'll just keep asking if there's a discount for paying cash...

Thanks for that...now cash will be on the illegal list too.

 

[Alan]

I think the only real difference is with a sales tax you have to find out who the final consumer is. If a business buys coffee for its kitchenette it should be taxed. But if it buys coffee to resell then it shouldn't be taxed (otherwise we tax the transaction every time it changes hands, which we don't want). Under a VAT, you only pay tax on the mark-up so you don't care who the end use customer is (and businesses have no ability to avoid the tax by saying they're re-selling when they are not).

An example that I came across all the time was that while traveling in countries which had VAT, we had to hang onto all the original VAT receipts when we spent money on expenses, from fast food stores to hotels etc. Even though all our expenses were managed on-line through credit card electronic receipts etc, all travelers were strongly encouraged to send in their original VAT receipts to their local accounts department.

These receipts were collected and sent overseas to the corporate office in Brussels where, once a year, a load of temps were hired, and all the receipts were collated and the VAT recovered from the various countries in which it had been paid. The process sounded horrendous but was worth millions / year.

 

[MasterBlaster]

The VAT rebates sound kinda like computer system rebates. Make it as difficult and complicated as possible to actually get a rebate. That way fewer people will actually get one.

That process is by no means an oversight.

 

[deserat]

Living here in Germany, the VAT is a reality - although you don't see the VAT - you just see the price on the item. When you purchase the item, you see the VAT listed - the amount you paid in "TVA." It is 19% here for material goods and 7% for restaurant service, etc. It is onerous at times....with the changing exchange rates and the VAT, we're very careful about what we buy on the economy. We do buy certain groceries on the economy at ALDI or PennyMarkt - I usually do not buy clothes (they are exorbitantly expensive here - case in point, many Europeans go to the USA to go shopping, specifically for clothes and electronic goods) and never buy electronics (except for cheap cell phone). Oh, and the VAT is on top of very high income taxes......

As I've written before, you do not see the large amplitudes in lifestyles around here - Germany is clean, the people work hard and the social structure is nice. However, they pay for it dearly. Also, people seem to forget that many US states have larger economies than many of the European countries. There are issues of scaling ideas to a national economy such as the USA - sometimes it doesn't scale well. For example, it's great to be able to use the train systems around here and all of the walking/bike paths -*however* the geographical land mass is much smaller than that of the USA - we drove to the Swiss/French border last weekend in 4.5 hours - I drove to Trieste last fall in 10 hours - that was through four countries. Heck, it would take me 11-12 hours to drive from Sacramento, CA to Phoenix, AZ, in the USA and I haven't even gone through two states!

As for getting your VAT back - it's a PITA - and usually you must spend a certain amount before they will refund the VAT. Also, that amount tends to similar to that which you must claim on your entry documents for the USA. The best shops refund it on the spot.

 

[Alan]

Also, people seem to forget that many US states have larger economies than many of the European countries. There are issues of scaling ideas to a national economy such as the USA - sometimes it doesn't scale well. For example, it's great to be able to use the train systems around here and all of the walking/bike paths -*however* the geographical land mass is much smaller than that of the USA - we drove to the Swiss/French border last weekend in 4.5 hours - I drove to Trieste last fall in 10 hours - that was through four countries. Heck, it would take me 11-12 hours to drive from Sacramento, CA to Phoenix, AZ, in the USA and I haven't even gone through two states!

Texas is almost twice the physical size of Germany

 

[swampwiz]

One argument I have heard in favor of the VAT is that it is simply another way to tax, such that the income tax does not have to be so high, which would make the "adverse economic behavior" due to the income tax rate be less strong - i.e., doing things to lower taxes legally OR illegally. With a VAT especially, since there would be a tax and various steps along the way, there would be less of an impetus to cheat at each point, rather than at one single point.

 

[swampwiz]

Texas is almost twice the physical size of Germany

I have driven all the way on I-10 - I love the sign that says "El Paso 869"!

 

[meierlde]

North South US 83 is the equivalent of I -10 in the east west direction and runs 783 miles, going from Brownsville, all the way to the Ok Panhandle, thru the Texas Panhandle. It is very much a country road with the only large cities being Brownsville, Laredo and Abline

 

[landover]

North South US 83 is the equivalent of I -10 in the east west direction and runs 783 miles, going from Brownsville, all the way to the Ok Panhandle, thru the Texas Panhandle. It is very much a country road with the only large cities being Brownsville, Laredo and Abline

Wow, VAT to distances in Texas, reminds me of this thread. Anyway it is a forum on ER.

I hazily remember more than one person telling that they have drive from one end to other on this road.

 

[deserat]

OK - I've driven those Texas roads, too. Yes, sometimes mind-numbing and a book on tape or great music in the car is a requirement As for thread wandering, I raise my hand - the point was about using ideas from smaller regions and thinking they would scale easily - I don't believe that is so.

Back to the VAT - cheating - hmmm, well, basically the VAT ends up being paid by the consumer. Like basic economics, the costs get passed along the chain until the end.

As for the OP's question - a VAT making an IRA conversion to a Roth a double-taxed event - perhaps. Depends on what the money in the Roth is used for and if the VAT aspect is resident in that particular transaction (see my previous posting on no VAT on food). I'll second Nords statement that basing your retirement investing decision on future tax policy is probably a folly as it changes.....quite a bit (70-90% income tax during Hoover and WWII).

Sort of off topic - I fear a VAT in the USA. It is very difficult for bureacracies (governments) to 'rollback' or turn off spigots of funds. Most of the people on this board would 'restrict spending' if the financial situation became dire. Yes, the offensive approach of finding more resources is a valid one, however, it seems our government (and most others around the world) isn't very good at the defensive approach. Once a VAT is placed in, it will not go away....and it will go up. Last time I was here in Germany the VAT was 15-16%. They raised it to 19% a few years ago. It has been steadily rising since it was enacted. ~20% of your money is a LOT. And, if they raise the VAT, that's an automatic inflation jump for that year - outside of natural economic forces.

 

[samclem]

With the foreign import tax, you point to a reference where separate treaties reimburse the VAT . . . the same could be done with a NST.

I suppose, but I haven't seen proposals to do that. Simplicity is a very good thing, and if we get into identifying "foreign content" (labor? materials?) so we can appply a NRST differently for imports than domestically produced goods, it will be so messy and complex (i.e. full of compliance costs and opportunities to cheat) that we might as well have a VAT.

And couldn't we "pre-bate" a certain amount of the VAT and tax everything too?

Only if we are willing to identify the ultimate retail purchasers (which you previously cited as a problem) and set up the "prebate" mechanisms and bureaucracy on top of the byzantine VAT bureaucracy. And, the folks pushing this VAT idea want to keep the FIT, too, so we'd keep that entire government structure and drain on our economy. It would just be a full employment program for government accountants.

HR 25 calls for eliminating the income tax and payroll taxes, and they would be replaced by a NRST. That's a different thing than adding a new tax on top of the cesspool of a tax code we have already.

 

[donheff]

I love OP's VATs - they helped me sell me much loathed boat in 2005. I listed that beast online and got three inquiries, all from Europe. I finally sold the thing to a guy from Belgium. The only hassle for me was that I had to drive it up to Baltimore to load on a container ship (that is an interesting process). The Belgian guy saved enough on VAT to pay for the transportation and still come out way ahead. He even researched accessories (Garmin Chart Plotter, etc) online and sent me a couple of thousand to buy them for him and hide them in the gunwales. Taxes are a motivator everywhere but he wouldn't have traded in his health care

 

[RonBoyd]

The Highest Taxes in the World | Taxes | Money/Investing | Mainstreet

View attachment Taxation of Wage Income - 2008.pdf

 

[MasterBlaster]

RonBoyd:

Those "AllIn" tax rates only include federal tax plus SS. They exclude state/local taxes plus property/sales/fuel taxes and other "user fees".

I am not convinced that the conclusion of the article (ie- we aren't taxed so much) is valid.

All-in:​

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​

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The all-in tax rate, calculated as the combined central and sub-central government income tax plus employee​

social security contribution, as a percentage of gross wage earnings.

 

[dex]

RonBoyd:

Those "AllIn" tax rates only include federal tax plus SS. They exclude state/local taxes plus property/sales/fuel taxes and other "user fees".

I am not convinced that the conclusion of the article (ie- we aren't taxed so much) is valid.

Don't forget embedded taxes e.g. Corp. Taxes that are ultimately paid by the end user.

 

[dex]

Back to the VAT - cheating - hmmm, well, basically the VAT ends up being paid by the consumer. Like basic economics, the costs get passed along the chain until the end.

Some of the cheating I remember are:
- Collecting VAT but not giving it to the Gov't
- Using a higher VAT rate to the consumer and giving the Gov't the proper amount
- Setting up a Company and reclaiming VAT never paid to a supplier
- Reclaiming VAT on items not allowed by VAT laws
- Bribing VAT auditors

 

[Gone4Good]

I suppose, but I haven't seen proposals to do that. Simplicity is a very good thing, and if we get into identifying "foreign content" (labor? materials?) so we can appply a NRST differently for imports than domestically produced goods, it will be so messy and complex (i.e. full of compliance costs and opportunities to cheat) that we might as well have a VAT.

I don't think the NST is any more simple. In a VAT everyone pays the tax but manufacturers get to deduct their "cost of good sold". With a NST, you'd need something similar where businesses would get refunded the tax they paid for items for resale. It seems simple enough to adjust the deductions so that they're discriminatory against whatever group you wanted to target. That's what I understand is happening with the VAT.

Only if we are willing to identify the ultimate retail purchasers (which you previously cited as a problem) and set up the "prebate" mechanisms and bureaucracy on top of the byzantine VAT bureaucracy.

We have to do that anyways, as explained above.


BTW, I don't really have any vested interest in a NST vs. VAT. I don't think either has a snow ball's shot in heck of becoming law. But just from a theoretical point of view, the two systems seem really very similar to me.

 

[Texas Proud]

Heck, it would take me 11-12 hours to drive from Sacramento, CA to Phoenix, AZ, in the USA and I haven't even gone through two states!

Texas is almost twice the physical size of Germany

Alan beat me.... but you can drive 11 to 12 hours and not get through the state... As the saying goes 'the sun has risen and the sun has set and you have not left TEXAS yet'....


Now let's see if someone from Alaska chimes in

 

[samclem]

. but you can drive 11 to 12 hours and not get through the state... .

Yep, I had a car like that once . . .

 

[samclem]

BTW, I don't really have any vested interest in a NST vs. VAT. I don't think either has a snow ball's shot in heck of becoming law. But just from a theoretical point of view, the two systems seem really very similar to me.

I agree that elimination of the FIT is very unlikely, but I'm not so sure something else won't be added atop it. I do see significant advantages for a NRST vs a VAT from a compliance cost perspective (at least if we look at real-world examples of VATs and the most "mature" proposal for a NRST, as embodied in present House and Senate products). The NRST, because of the "prebate" feature, is a more appropriate replacement for the FIT. Either would be better than the FIT, but I'd rather stick with the FIT than add either on top of it.