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VAT is on the table
Old 05-28-2009, 11:37 AM   #1
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VAT is on the table

It seems a VAT is becoming part of the discussion on how to solve the revenue/spending problem.

Politics | National sales tax idea getting fresh look | Seattle Times Newspaper

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his VAT plan. "It's common to the rest of the world, and we don't have it."

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
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Old 05-28-2009, 11:41 AM   #2
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"And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all"

I think I have a different definition of "do it all" than Mr. Burman has.
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Old 05-28-2009, 11:44 AM   #3
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Call it what you will - it is a national sales tax and it is a regressive tax. As such I don't think it will get much traction now. But in 10 years or so - yes.
It does create jobs - I had to deal with it in Europe.
Jobs are added by companies that must administer it and government that audits the companies.
So the real cost is the tax plus admin. costs that are incorporated into all goods and services.
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Old 05-28-2009, 11:44 AM   #4
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I could support a national sales tax if it included full repeal of the 16th Amendment and depending on the details. I would not support a VAT or a national sales tax if the law authorizing the federal income tax was still on the books. And I suppose they'd have to tweak things to make it less regressive.

This is the sort of thing people feared about Roth IRAs.
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Old 05-28-2009, 12:13 PM   #5
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As it is a consumption tax us LBYM types would be impacted less.
Unless you have already paid taxes on your Roth Ira.
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Old 05-28-2009, 12:20 PM   #6
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Unless you have already paid taxes on your Roth Ira.
Damn I knew there would be a catch.
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Old 05-28-2009, 12:43 PM   #7
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Granted, you might save money on health care costs (might), but introducing a 25% VAT would basically represent on huge, one-time hit on everyone's nest egg and purchasing power. I know that, even though I LBYM, a 25% VAT would reduce my purchasing power by 20%, even if my health care costs fall to zero (and they won't). Plus let's not forget that in Europe they don't have to pay sales taxes at the state, county and city level... I am not against instoring a VAT per se, but 25% is lunacy... Maybe 5-10%. I also wonder what effect this could have on the GDP, 70% of which depends on consumer spending. If more of your money goes to pay the VAT, that leaves you with much less money to buy other stuff...
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Old 05-28-2009, 12:45 PM   #8
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This is the sort of thing people feared about Roth IRAs.
Ding Ding Ding Ding!! One reason why I have so far avoided Roths for the most part. Why pay a tax now that I may be able to avoid or minimize later?
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Old 05-28-2009, 12:52 PM   #9
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I could support a national sales tax if it included full repeal of the 16th Amendment and depending on the details. I would not support a VAT or a national sales tax if the law authorizing the federal income tax was still on the books. And I suppose they'd have to tweak things to make it less regressive.
Yes, exactly. Not an additional tax but a replacement tax. One problem witht he VAT is the big admin overhead and the complex nightmare of capturing each step of production and taxing it (if one division of a corporation transfers a component to another division, is that taxable? If one company in a conglomerate sells the part to another company? What if one is an overseas entity?) Plus, because a VAT is included in the price of all goods produced, US goods built for export would be less competitive in price than those produced in nations without a VAT. OTOH, a national retail sales tax avoids a lot of these problems. The regressive nature of a national retail sales tax is to be handled with the "prebate" that the govt would pay to all legal US residents. The prebate is a check for all taxes that would have been paid on expenditures up to the US poverty line. Yes, this isn't perfect (look for the poverty line to be subject to political winds, and I'm not wild about every American receiving a government check, but since we seem to be headed in this way anyway, we might as well get something in the bargain--dumping our present tax code and bringing home billions of investment dollars and hundreds of thousands of jobs that are now overseas.)

There's a rally Saturday, June 13th in Columbia, MO to support the national retail sales tax. I think there's a push in Missouri to dump the state income tax in favor of a sales tax patterned after this. More info on the proposal and the rally.
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Old 05-28-2009, 01:11 PM   #10
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There already is a national sales tax. It is administered and collected by Google. It surely permeates every single little bit of commerce already. The rate is rather low, so you don't notice it much yet unless you are on the direct paying end of it.
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Old 05-28-2009, 01:28 PM   #11
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European countries have both an income tax and VAT - so don't think it would be different here.
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Old 05-28-2009, 02:06 PM   #12
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And here I was crowing about being state income tax exempt, after so many years of paying.
Now the concept of a national VAT rears it's ugly head.
I can't even threaten to move north to Canada (like the good ol' days) to escape something like this.
NY has put something like this VAT into effect already but on a much smaller scale and on targeted items (soda, luxury services, some club memberships, etc).
Now where did I leave my torch and pitchfork ?
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Old 05-28-2009, 02:22 PM   #13
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Ding Ding Ding Ding!! One reason why I have so far avoided Roths for the most part. Why pay a tax now that I may be able to avoid or minimize later?

But you are not really paying a tax now as opposed to later... you got money.... you can not put it in a tax deferred account (or it does not make any sense to put it there)... so your choice is to put it in ROTH or a taxable account where you pay tax on the income... year after year.... I would rather put it in a ROTH and at minimum defer the taxes on the income...
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Old 05-28-2009, 02:28 PM   #14
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But you are not really paying a tax now as opposed to later... you got money.... you can not put it in a tax deferred account (or it does not make any sense to put it there)... so your choice is to put it in ROTH or a taxable account where you pay tax on the income... year after year.... I would rather put it in a ROTH and at minimum defer the taxes on the income...
I should have said that I shun Roths in favor of Traditional IRA's. So far, I have managed to remain "low income" enough to still be eligible to contribute to traditional IRA's and get a decent tax break. I also pay 7%+ state income taxes, so that points towards a traditional IRA as well. As a result, I get the current tax deductions today, and invest the tax savings.

Who knows which state I will be a resident of when withdrawing in 10+ years?? I may be domiciled in one without a state income tax!
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Old 05-28-2009, 02:30 PM   #15
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But you are not really paying a tax now as opposed to later... you got money.... you can not put it in a tax deferred account (or it does not make any sense to put it there)... so your choice is to put it in ROTH or a taxable account where you pay tax on the income... year after year.... I would rather put it in a ROTH and at minimum defer the taxes on the income...
Not necessarily.

For example, the most commonly "accepted" order to fund retirement investing is usually:

1) 401K up to the company match
2) Roth IRA
3) 401K up to the max
4) Taxable investment accounts

If the feds changed from an income-based tax to a consumption-based tax, then (2) and (3) above could be backwards, and *currently* deferring income taxes would seem the superior choice since there would be no more income tax upon withdrawal in the future. Someone putting in $5000 to a Roth after getting the full 401K match may have been better off putting $5000 more into the 401K instead if the money will be taxed when it's spent instead of when it's earned or withdrawn from a retirement account.

(Having said that, they'd *probably* find a way to tax 401K and conventional IRA withdrawals anyway, even if they abolished the income tax.)
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Old 05-28-2009, 02:33 PM   #16
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Plus, because a VAT is included in the price of all goods produced, US goods built for export would be less competitive in price than those produced in nations without a VAT..
First, a lot (if not all) European countries have a VAT... don't know about Asian countries...

Second, it should apply to sales INSIDE the country... not exports... so it would not make our products less competitive...
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Old 05-28-2009, 02:38 PM   #17
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Start adding it up. VAT, Cap and Trade, Income Tax, it all spells a lower standard of living for most retirees! My prediction is Washington will never replace one tax with another unless the new tax brings in more money than the one it replaces.
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Old 05-28-2009, 02:39 PM   #18
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Not necessarily.

For example, the most commonly "accepted" order to fund retirement investing is usually:

1) 401K up to the company match
2) Roth IRA
3) 401K up to the max
4) Taxable investment accounts

If the feds changed from an income-based tax to a consumption-based tax, then (2) and (3) above could be backwards, and *currently* deferring income taxes would seem the superior choice since there would be no more income tax upon withdrawal in the future. Someone putting in $5000 to a Roth after getting the full 401K match may have been better off putting $5000 more into the 401K instead if the money will be taxed when it's spent instead of when it's earned or withdrawn from a retirement account.

(Having said that, they'd *probably* find a way to tax 401K and conventional IRA withdrawals anyway, even if they abolished the income tax.)
True... if that is the order people put in the accounts....

I recommend...

1) 401(k) up to company match (no matter what tax bracket)
2) continue with 401(k) until you drop into the 15% tax bracket
3) ROTH 401(k) or IRA
4) taxable account

So my example is after 1 and 2 are no longer available... you now only have 3 or 4....

Like Fuego said, why pay a tax now if you do not have to... that is why I use this order....
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Old 05-28-2009, 02:50 PM   #19
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Like Fuego said, why pay a tax now if you do not have to... that is why I use this order....
It could make sense if you plan on being in a higher tax bracket in ER than you are in now. Or your crystal ball indicates marginal tax rates increasing dramatically in the future.
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Old 05-28-2009, 02:53 PM   #20
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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?
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