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Old 05-28-2009, 02:57 PM   #21
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I don't understand why you all are saying that the ROTH would be a bad deal if there's a VAT. I know I'll probably be in a higher tax bracket in the future and if you have to buy something then you'll pay the VAT no matter where the money comes from, ROTH or 401K.
It depends on whether or not the VAT displaces or significantly reduces the income tax. If not, it's a wash.

If it does reduce or eliminate the federal income tax, then you'd be better off with investments which were *never* taxed at the time you withdraw and spend the money than with investments on which the contributions were already taxed.
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Old 05-28-2009, 02:59 PM   #22
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But if you don't have a 401K, and don't qualify for the Regular IRA deduction, you're left with the ROTH anyway, right?

I don't understand why you all are saying that the ROTH would be a bad deal if there's a VAT. I know I'll probably be in a higher tax bracket in the future and if you have to buy something then you'll pay the VAT no matter where the money comes from, ROTH or 401K.

Could someone explain in simple terms please?
One of the reasons for a ROTH was not paying any tax on the income... if there is a VAT you are going to pay a tax on the income if you buy something.. so now it is only a deferral of taxes... so not as beneficial as when you put the money into the account.
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Old 05-28-2009, 03:02 PM   #23
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Could someone explain in simple terms please?
It would be better to have money in a Trad IRA instead of a Roth if the VAT replaces an income tax or substantially replaces an income tax. The Trad IRA gives a tax break upon the contribution, then you pay tax when you withdraw. I am assuming that the future tax rates on Trad IRA withdrawals would be lower than today's rate due to part or all of our federal tax collections coming from a VAT.

In other words, today I get a 15% tax cut on every dollar I put into a Traditional IRA, and zero tax cut for $$ put in a Roth. When I withdraw, the VAT may be in place, and the marginal tax rate on my withdrawals could likely be below 15% (or even zero). The tax rate on the Roth would be zero regardless.

With a Trad IRA I get a current tax break, and potentially less or no income tax in the future.
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Old 05-28-2009, 03:18 PM   #24
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Could someone explain in simple terms please?
Think of it this way, if you already paid 15% tax on your Roth contribution or rollover and the gumint replaces the income tax with a 15% VAT you now have to pay that tax when you spend your Roth money. Tax to you on that money = 15% income tax and 15% VAT tax = 30% tax to you for being smart.
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Old 05-28-2009, 03:57 PM   #25
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Second, it should apply to sales INSIDE the country... not exports... so it would not make our products less competitive...
In the VAT implementations with which I am familiar, the tax is paid at each step in the production process (that's why it is a value added tax-- each time value is added during production, the tax is paid). So, when a car manufacturer builds a car, that company pays tax on the difference between what the car is sold for - (the value of the components + labor used in manufacturing). Likewise for every component of that car: the tire manufacturer paid a tax on the difference between the final price the auto manufacturer paid for the tire and the price of the raw rubber, the steel belt material, the energy used, labor costs, etc. This tax is paid for every single component--wire, wiper motors, grease, etc. Thousands of items. Now, when it comes time to price the car for retail sale, all those embedded taxes are already priced in. To untie that knot and figure out how to "unpay" those taxes if the vehicle is to be sold abroad is a terrific headache. The VAT has been a huge administrative burden in Europe, the friction it causes has significantly reduced the competitiveness of European products. As much as I hate the income tax, it is better than VAT. Worse yet: if we have both VAT and the present income tax.
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Old 05-28-2009, 04:15 PM   #26
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Ok, I get it. Thanks for the explanations. But there will be many things that you pay for that won't be subject to a VAT, like the mortgage, if you have one, medical care, used goods (furniture, etc.). So it may be that it won't necessarily mean that cost of living will increase if you want to get around it.

I would think that the reason for the VAT (reducing national debt) would necessitate keeping the income tax at the same rate. But I'm certainly not going to predict anything.
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Old 05-28-2009, 04:37 PM   #27
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double post...
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Old 05-28-2009, 04:38 PM   #28
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In the VAT implementations with which I am familiar, the tax is paid at each step in the production process (that's why it is a value added tax-- each time value is added during production, the tax is paid). So, when a car manufacturer builds a car, that company pays tax on the difference between what the car is sold for - (the value of the components + labor used in manufacturing). Likewise for every component of that car: the tire manufacturer paid a tax on the difference between the final price the auto manufacturer paid for the tire and the price of the raw rubber, the steel belt material, the energy used, labor costs, etc. This tax is paid for every single component--wire, wiper motors, grease, etc. Thousands of items. Now, when it comes time to price the car for retail sale, all those embedded taxes are already priced in. To untie that knot and figure out how to "unpay" those taxes if the vehicle is to be sold abroad is a terrific headache. The VAT has been a huge administrative burden in Europe, the friction it causes has significantly reduced the competitiveness of European products. As much as I hate the income tax, it is better than VAT. Worse yet: if we have both VAT and the present income tax.

I did not study it, and I could be WAY OFF on this... but I think that the VAT in England was only on the final sale... really more of a sales tax that was not a sales tax... but maybe they did tax it the whole way..

I do know that if you bought something in England and shipped it to the US (and it was over a certain price) you could get your VAT taxes refunded... at least when I was there...


A final question... what if you do not add any 'value'?
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Old 05-28-2009, 05:09 PM   #29
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European countries have both an income tax and VAT - so don't think it would be different here.
Yeah, I would expect a VAT might be added into the mix to cover health care but don't expect the income tax to disappear.
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Old 05-28-2009, 05:23 PM   #30
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In a switch to VAT, Roth's might get no help, but I bet traditional IRA/401k's would still be taxed somehow, since that money was not already taxed. So tax diversification would still be useful.
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Old 05-28-2009, 05:42 PM   #31
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As it is a consumption tax us LBYM types would be impacted less.
Nope.

It's pretty much always safe to assume that savers get screwed. In the case of a VAT, the saver has already paid taxes on his income, now at some future date he also gets to pay a tax on his spending. The person who spent 100% of his income before the VAT was instituted makes out better.
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Old 05-28-2009, 05:46 PM   #32
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Nope.

It's pretty much always safe to assume that savers get screwed. In the case of a VAT, the saver has already paid taxes on his income, now at some future date he also gets to pay a tax on his spending. The person who spent 100% of his income before the VAT was instituted makes out better.

Hey now. Its the savers duty to pay for the less fortunate
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Old 05-28-2009, 05:49 PM   #33
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In the VAT implementations with which I am familiar, the tax is paid at each step in the production process (that's why it is a value added tax-- each time value is added during production, the tax is paid). So, when a car manufacturer builds a car, that company pays tax on the difference between what the car is sold for - (the value of the components + labor used in manufacturing). Likewise for every component of that car: the tire manufacturer paid a tax on the difference between the final price the auto manufacturer paid for the tire and the price of the raw rubber, the steel belt material, the energy used, labor costs, etc. This tax is paid for every single component--wire, wiper motors, grease, etc. Thousands of items. Now, when it comes time to price the car for retail sale, all those embedded taxes are already priced in. To untie that knot and figure out how to "unpay" those taxes if the vehicle is to be sold abroad is a terrific headache. The VAT has been a huge administrative burden in Europe, the friction it causes has significantly reduced the competitiveness of European products. As much as I hate the income tax, it is better than VAT. Worse yet: if we have both VAT and the present income tax.
In Europe the car mfg. does pay the VAT to the VAT authority. But, it gets back the VAT from the VAT authority on the things that go into producing the car. It does not get back the VAT on things like entertaining expense and other expense items. So the final consumer pays the VAT on the purchase and of course the embedded VAT that the car mfg could not get back.

Bottom line thing like VAT and corp. tax is a way to hide the total tax the final consumer is paying.

The real question is: Can this regressive tax be sold to the USA public?
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Old 05-28-2009, 05:58 PM   #34
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The real question is: Can this regressive tax be sold to the USA public?
Not likely.

But it doesn't necessarily need to be regressive. A simple refund of $2,500 per person (equivalent to the tax on the first $10,000 of spending) makes the VAT progressive.

On the other hand, if you make the refund big enough, you might just get it passed.
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Old 05-28-2009, 06:19 PM   #35
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Not likely.

But it doesn't necessarily need to be regressive. A simple refund of $2,500 per person (equivalent to the tax on the first $10,000 of spending) makes the VAT progressive.

On the other hand, if you make the refund big enough, you might just get it passed.
The % would need to be higher than the VAT % to recoup all the embedded costs of the system. With that higher % know people might then question the wisdom of it.

The flat tax or fair tax might then be discussed also - neither of which would pass - too simple.
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Old 05-28-2009, 06:25 PM   #36
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As it is a consumption tax us LBYM types would be impacted less. For those of us with higher incomes if made progressive it could hurt more. I was living in Canada when they initiated it there. I remember all the furor and clamour at the time, now it is seems business as usual and all the doom and gloom impacts didn't apparently materialize. Hopefully some of our Canadian posters can shed further light on how well it has worked out.

DD
I have experienced VAT (up to 23%!!!) in Europe and GST (Goods and Services Tax) here in Canada. In both circumstances, certain essential items are exempt, like food, children's clothing, books and healthcare. GST was introduced in the 1990s at 7% and has always been unpopular. The current government cut it to 6% last year and then to 5% this year. That was a politically astute but economically dumb mistake. It has reduced government revenues by ~$12 BN. And we really need that $12 BN now that this year's deficit (the first in ~12 years) is projected at 0ver $50 BN.
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Old 05-28-2009, 06:46 PM   #37
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The VAT system was intentionally created so that the tax is paid solely by the consumer and not by the intermediaries (they only collect the VAT). As such, it is often called an indirect consumption tax.

Let's assume the following, simplified example:

With no VAT:
a farmer sells $100 worth of wheat to the mill (profit $100). The mill makes the flour and sells it for $200 to the baker (profit $100). The baker makes bread and sells it for $300 to a consumer (profit $100).

With a 20% VAT:
the farmer sell $100 worth of wheat to the mill and collects $20 in VAT from the mill. The mill makes the flour and sells it for $240 to the baker. The mill pockets $100 in profit, and collects $20 in VAT from the baker ($200*0.2-$20 collected by the farmer). The baker makes the bread and sells it for $360 to the consumer. The baker pockets $100 in profit and collects $20 in VAT from the consumer ($300*0.2-$20 collected by the mill-$20$ collected by the farmer). At the end, the consumer pays $360 instead of $300 for the bread, or a 20% "sales tax". He is the only one who actually pays the tax. The intermediaries are still making the same profits as before.

One advantage of the VAT: traceability. The fiscal services can track a product from beginning to end (you have to declare all purchases and sales during the entire production cycle) and collect taxes in small chunks along the way, instead of one large chunk at the end, so that it becomes much harder to cheat by under-reporting sales (since the government knows what you bought, they also know what you should have sold).
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Old 05-28-2009, 07:07 PM   #38
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Yes, I can certainly see that it is a very simple system. Full employment for accountants for as far as the eye can see.
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Old 05-28-2009, 07:55 PM   #39
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I'm not a fan of "hidden" taxes. I wish taxes were broken out as a separate line item for everything we buy. I think it might open some eyes if we saw the $2.39 gallon of gas sold as $1.79 plus 60 cents state and federal tax.

I'd prefer to have it more obvious to everyone how much they are paying in taxes without realizing it.
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Old 05-29-2009, 06:51 AM   #40
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With a 20% VAT:
the farmer sell $100 worth of wheat to the mill and collects $20 in VAT from the mill. The mill makes the flour and sells it for $240 to the baker. The mill pockets $100 in profit, and collects $20 in VAT from the baker ($200*0.2-$20 collected by the farmer). The baker makes the bread and sells it for $360 to the consumer. The baker pockets $100 in profit and collects $20 in VAT from the consumer ($300*0.2-$20 collected by the mill-$20$ collected by the farmer). At the end, the consumer pays $360 instead of $300 for the bread, or a 20% "sales tax". He is the only one who actually pays the tax. The intermediaries are still making the same profits as before.

One advantage of the VAT: traceability. The fiscal services can track a product from beginning to end (you have to declare all purchases and sales during the entire production cycle) and collect taxes in small chunks along the way, instead of one large chunk at the end, so that it becomes much harder to cheat by under-reporting sales (since the government knows what you bought, they also know what you should have sold).
Wow, I had no idea the tracking was that complicated. I assume businesses must already be collecting all of the inputs, outputs, and profits details to keep their books? There would be a major incentive to misstate the profits.
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