VAT is on the table

[Zoocat]

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.

 

[Texas Proud]

double post...

 

[Texas Proud]

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'?

 

[donheff]

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.

 

[Animorph]

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.

 

[Gone4Good]

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.

 

[Notmuchlonger]

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

 

[dex]

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?

 

[Gone4Good]

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.

 

[dex]

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.

 

[Meadbh]

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.

 

[FIREd]

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).

 

[samclem]

Yes, I can certainly see that it is a very simple system. Full employment for accountants for as far as the eye can see.

 

[ziggy29]

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.

 

[donheff]

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.

 

[freebird5825]

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.

This site may prove to be useful.
Gas Prices - MSN Autos
It did not show the breakout of base price and taxes, but with a little digging, it might pop out. I couldn't find the details. The data source is referenced here Gas Prices Information - MSN Autos

 

[dex]

There is one Federal Tax benefit - VAT collects money from illegal operations such as from illegal drug dealers. Currently, these people do not pay income taxes but would pay a national sales tax on the things they buy.

 

[samclem]

There is one Federal Tax benefit - VAT collects money from illegal operations such as from illegal drug dealers. Currently, these people do not pay income taxes but would pay a national sales tax on the things they buy.

Right, either a VAT or a National Retail Sales Tax (or "Fair Tax") would do that. Likewise, tourists to the US would pay taxes on their hotel rooms, food, etc purchased in the US. Illegal aliens, too. And the large number of people who earn money in the "grey" economy (working for cash) would pay taxes when they buy things. One unanswered question is how much a national retail sales tax would increase this grey economy--a 20-30% tax would provide quite an incentive to sell things outside the system at lower cost. Still, it probably wouldn't be any worse than cheating under the present system. And if you buy a "new" grey market car or dishwasher, where do get warranty service? BTW, the "Fair Tax" {I hate that name!} version of the national retail sales tax is the most "mature", as it is presently a bill (HR25 and S296) under consideration. Under the Fair Tax, there's no tax charged for used goods (hey, everyone in favor of reducing landfill waste should be in favor of this!). More details/FAQs at this site. There's also some very thorough, balanced pro/con on the proposal in Wikipedia.

 

[Rustic23]

The politicians will do everything possible to get this passed. It adds more money for them to spend, and it hides it from the public that will pay it. It is easy to increase in very small increments, who is going to complain about a tenth or quarter of a percent compared to 4% increase in inflation. It will be passed as 'the only way to pay for health reform'.

 

[deserat]

I live in Germany right now - the VAT percentage is 16%. When you buy something, you see the total price and then below that they show the amount of the total that is the VAT tax. When we travel to other countries, they will show the percentage of the VAT tax on items which have different percentages. For example, last weekend in Iceland, it showed the VAT tax on wine to be 34%.

Usually food stuffs (groceries) are not VATted, just material goods or finished goods.

It is an onerous tax like sales tax - I cringe to think that there would be a national sales tax and then a local one - those average between 6-10% at city/county/state levels.

 

[Gone4Good]

and it hides it from the public that will pay it.

I'm not sure about that. I just rented a car for a trip to Scotland and I can tell you my VAT is 15.62 pounds.

When I earn $1 from freelance work here in the states I can't tell you how much I'll owe in taxes until I pay my accountant.

And for most salaried folks, taxes disappear from their pay check every week. Many probably have no clue how much they ultimately pay. Most think their tax bill is the fraction they pay, or get back, on April 15th.

 

[atlas888]

When income tax rise to unacceptable level, I intend to scale back on work. The Labor government in the UK wants to raise the top bracket to 61%. If similar thing comes to bear in the US ,the diminishing return on each additional dollar will not be worth the extra time,effort and wear and tear on the mind and body.

Introduction of a VAT, especially at a rate of 25%, will mean that I will be even more selective in what I want to spend my money on. Because true essentials will not have VAT, that additional tax may bring less than government wants, if everyone buy only what he truly needs and weighs cost vs benefits carefully.

 

[Gone4Good]

if everyone buy only what he truly needs and weighs cost vs benefits carefully.

If people are happy to spend $1,000 for a designer hand bag, or $75,000 to have a certain emblem on the hood of their automobile, or even $2.50 for a fifty cent cup of coffee, do you really think a 25% VAT is going to change consumption behavior?

It's the perfect anti-supply side tax. All the yuppie go-getters will just have to work 25% harder to afford all the nonsense they feel they have to own to justify their inflated self worth. It's perfect!

 

[FIREd]

I'm not sure about that. I just rented a car for a trip to Scotland and I can tell you my VAT is 15.62 pounds.

Yes, it's truly easy to figure out how much you paid in VAT, because, as my example above shows, the consumer pays the whole tax. So if the VAT is 20%, from the consumer prospective, it is no different than paying a 20% sales tax on everything you buy.

 

[Lawrence of Suburbia]

A real economy-killer, at least as far as non-essential purchases (and industries) go. The only way a VAT would work in the U.S. is if it replaces the income tax; and we know what the chance of that happening is!

For me, a 15% VAT means I simply buy 15% less stuff, because I spend 100% of my take-home pay on stuff now. And I suspect I'm not the only person in that position these days. Anyway, the economy would suffer, I believe. And people would feel a lot poorer (because they'll still be paying that income tax.)