BrainTrust Query: Is a Value Added Tax (VAT) All That Bad?
Commentary by Bill Bittner, president, BWH Consulting
Like most people, my
first reaction to the discussion of a value added tax (VAT) is "no way."Â
But when you sit back and think about it, maybe a VAT makes some sense.
The
VAT has been mentioned in some of the proposals to address the U.S. budget
deficit. First, it is important to realize that just about every major economy
the U.S. competes with has some sort of VAT tax. Because they get much of their
government funding from a VAT, these other nations are able to reduce income
taxes on both businesses and individuals. This (along with lower wages) has
led some U.S. businesses to consider going overseas.
However, by better aligning
U.S. government revenue streams with their foreign competitors, it makes it
easier for the U.S. to retain and attract more businesses. Corporations who
have hesitated to repatriate earnings achieved overseas will no longer believe
they must leave them there to avoid high tax rates.
The VAT is one of the most
efficient ways a government can collect taxes. Like a sales tax, the seller
collects the VAT on their sales. The difference is that each business (raw
material suppliers, manufacturers, and retailers) also gets a tax credit for
the purchase of their inputs. This means the purchaser makes sure the seller
properly records their VAT payment. Businesses are actually checking on one
another to make sure they get their tax credit.
The chief complaint about
the VAT is that it is a regressive tax, charging everyone the same rate on
their purchases regardless of their income. This weakness can be addressed
by introducing more progressivity in the income tax rates. Low-income individuals
might even receive a tax credit that would represent a reimbursement for their
VAT payments. But in all cases, because the government has an additional revenue
stream, the income tax rates would be reduced.
The National Retail Federation
recently warned of the affects of a VAT without changing income taxes, but
I think it might be worthwhile to consider the combination of a VAT and lower
income taxes. This could sustain the government revenues while putting U.S.
businesses in a more competitive position because of their lower income tax
rates. It might even bring home some of those overseas assets for investment
in the U.S.
Discussion Questions: Does the argument work that collecting VAT in this country
would make the U.S. more competitive with its rivals overseas that do the same?
Is it politically feasible that a major new tax structure could be implemented
in this country?
VAT, like almost any tax, is feasible under certain conditions. Unfortunately, those certain considerations vary with each vested segment of society. With only about half of America’s citizens now paying taxes, VAT would become an enormous political football since everyone would then have to pay that new tax … but every citizen has a vote whether they are a taxpayer or not.
What’s best the best tax structure for America today? Where there’s a will there’s a way, but do we have the will today?
Yes, a VAT is all that bad if it is coupled with income tax (as opposed to Fair Tax plans which replace the income tax with a VAT). Once a tax is in place, it’s nearly impossible to get rid of it. And it is regressive only to the extent that everyone buys the same stuff. If one assumes wealthier people buy more expensive products, then wealthier people will pay more in VAT.
Will this happen in our lifetimes? Not very likely. Politicians are not going to vote to raise taxes or add taxes in this political climate.
Any tax is a bad tax. It might be feasible if it replaces the personal and corporate income taxes. That way everyone pays the same percent and harder working higher income job producing people are not punished for earning more and being more creative and ambitious.
Interesting that the VAT discussion has once again bubbled up at a time when governments at all levels are under extreme financial duress and Congress is treating tax revenue increases as so much political poison. I have serious doubts that this course of action can ever attain serious traction because discussion of its merits will be overwhelmed by shrill partisan maneuvering.
In the recent elections here in Arizona, at least two candidates for the House were excoriated and called “dangerous” for past favorable comments they made about the idea of a so-called “Fair Tax.” Both failed in their bids to dislodge incumbents.
We must recognize we have a large set of institutions and practices in this country that are organized around our present mode of taxation. VAT would force a reset not only of the Federal income tax system, but also of the entire patchwork of state and municipal income and sales taxes. Our unwieldy Democracy is not built for this kind of sweeping systematic change.
The VAT scenario is intellectually interesting but ultimately will be a non-starter. When it comes to tax reform, there is no greater inertia than the status quo.
Yes, VAT makes sense, as it is a consumption tax that will encourage savings and investment over spending. However, if implemented, it has to be a substitute for current taxes. Unfortunately, it would likely be layered on top.
Our representatives in Washington need to learn fiscal restraint. CUT SPENDING!! If you don’t have it, don’t spend it.
Call it a VAT tax or flat tax or anything else; our country needs to come up with a simpler way to collect and distribute taxes.
Economics is hardly my strong suit. I get confused easily. I try to think in terms of simple analogies. It seems to me, for example, that a VAT combined with a reduced income tax would be a dream for Uncle Scrooge–greater incentive to earn; dis-incentive to spend. His mattresses would be positively bursting with cash.
Now, some time ago, I remember hearing how Americans needed to save more money and how very, very bad we were in that respect compared to our counterparts overseas. With VAT, we could all be wonderful savers–Scrooges all! Retailers, of course, abhor savers, hence my confusion. When there’s no spending, there’s no retail growth. Can someone explain what’s best for our dear country? Should we spend or save? And how would VAT play into this process?
It’s bad because it is another form of taxation that, once launched, will never disappear. Even if politicians gave small income tax reductions while passing a VAT, the income taxes would creep right back up and the VAT would never go away.
One would have to be extremely naive to believe that our politicians can wean themselves from any tax structure in favor of a new one. Any new source of revenue would ultimately become incremental to our existing structure. It would be like giving methadone to a heroin addict without making the heroin completely unavailable.
You need only look to Europe and Scandinavia to see layers of tax topped off with VAT. There will always be some extreme circumstance requiring a need to bring back an income tax. And you want to be at the mercy of a group that believes that for every dollar of unemployment benefit we pay, we get $1.38 in return? That is right up there with “bogos drive profit to the bottom line.”
I would support the Fair Tax much more than a VAT. While VATs are also consumption taxes, and better than income taxes, the FairTax is not a VAT. A VAT works very differently. It taxes every stage of production. It is much more complex and is typically hidden from the retail consumer. Second, in industrialized countries that have a VAT, it coexists with high-rate income tax, payroll, and many other taxes that, in some instances, have led to marginal tax rates as high as 70 percent. Third, all other industrialized countries, except Australia and Japan, have a much larger tax burden than the U.S., which requires higher rates and makes tax administration much more difficult. Lastly, a VAT is a lobbyist’s dream, allowing them to install their loopholes unbeknownst to the purchaser. A retail sales tax, in contrast, is a lobbyist’s nightmare, applied as it is under the bright lights of the retail counter.
The FairTax Act (HR 25, S 296) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities.
The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
The Fair Tax:
Enables workers to keep their entire paychecks
Enables retirees to keep their entire pensions
Refunds in advance the tax on purchases of basic necessities
Allows American products to compete fairly
Brings transparency and accountability to tax policy
Ensures Social Security and Medicare funding
Closes all loopholes and brings fairness to taxation
Abolishes the IRS
Many of the panelists correctly identified the need to ensure that a consumption targeted VAT be concurrent with reductions in other income related taxes. Without such reductions the VAT would be a massive additional tax.
One of the benefits of a VAT not discussed at length amongst the panelists is the benefit to our manufacturing and export base (and thereby our balance of trade). Foreign manufacturers enjoy advantages of lower labor and corporate taxes due to the VAT in their countries which makes their exports to the US even more competitive to US produced products. Additionally the lack of a US VAT has the incentive of moving US manufacturing offshore where it is more profitable to produce and the export to the US than to make it here.
However, as James Tenser so succinctly states, there is no greater barrier to implementing the VAT/tax reform “than the status quo” and I might add, an upcoming election.
I live in Washington DC, and there is ZERO support for a VAT. No, less than zero. End of discussion.
A VAT tax would have an unequal impact on citizens at different income levels, making it inherently fair. It also would tend to dampen consumer spending in the broad middle segment, not a happy prospect for retailers.
Raising taxes is not the solution. When nearly 50% of wage earners pay no income tax, you have a problem. Those people are always willing to raise taxes on the rest of the population because they are not impacted.
The real problem is spending. Government has to learn that they can’t spend what they don’t have. Instead, they spend and want to increase taxes to cover it.
A VAT tax without revising the other tax codes is a bad idea. We did not get to be one of the most powerful countries by doing what they do in Europe. Many of the European countries are now starting to emulate what we were doing that made us great.
We can’t continue to provide for all of the cost of illegal immigrants (health care, education, etc.) by raising taxes on our citizens.
Poppycock! Every one of the arguments presented was specious, even without considering the frequent “ifs” with which the suggestion is qualified. And speaking on behalf of finance departments everywhere, I can assure you the reporting requirements would be anything but minor. I would give my customary wishes for Happy Holidays, but I think for one of us the eggnog has begun flowing already.
Ms. Hotka has it absolutely right. There is less support for a VAT than the Fair Tax which, itself, has little or no support.
As long as the overwhelming majority of lawmakers are ‘jobless’ political professionals, there will be little or no change to our tax structure–period.
All one needs to do is read the proposed ‘compromise’ between Mr. Obama and the Republicans to understand that this group absolutely requires complexity in order to hide the result of anything (or should I say nothing) getting done. If it was simple, they wouldn’t be able to trade that for this and this for that and wind up at zero.
I am immediately on guard when somebody suggests VAT might be a way to address the budget deficit. The budget deficit is a result of spending too much rather than not taxing enough. So if the suggestion of a VAT is in addition to existing taxes, I’m out.
If a VAT is being suggested as a revenue-neutral alternative to the income tax, then I’ll join the conversation. I am generally with those who suggest that it is a more pro-growth tax than the income tax. I am concerned about the burdens it might place on smaller businesses to assess and collect the tax.
My biggest concern about a VAT, however, is transitioning from an income tax to a VAT tax. I seriously question whether it can be done politically in a way that’s revenue-neutral. My feeling is that if opening up the question would lead us to an effective higher tax rate, with VAT on the books with an income tax rather than instead of an income tax, then I’d rather leave the question closed.
One more argument against VAT is that, while everyone regardless of income pays the same amount of tax per purchase, people on lower incomes spend a larger proportion of that income and are, therefore, paying a greater percentage of what they have in the form of tax. There is massive disincentive to spend on discretionary items rather than saving which means that a vast proportion of “harder working higher income job producing people” could become even “more creative and ambitious” while those earning less would be the ones punished.
A VAT just makes sense. It allows for a more reliable income stream for the government, and is no different than the sales taxes that almost every state collects already. Having a federally managed VAT allows for a more reasonable income tax (and one that is less complex) while having a direct, positive impact on the income stream which taxes provide for the government.
The VAT is highly probable, right after hell freezes over. The problem is the same as attempts to enact a sales tax here in Oregon. It’s not that it doesn’t have some merit, simply that the people promoting it are only doing so to obtain greater tax revenues, aka bigger government, PERIOD. Fairness is a false cover for the truth.
Having lived in and operated a retail business in the UK back in the 1970s, I personally experienced the introduction of a VAT tax. “Back in the day” that tax was set at 15% on all non-food purchases but, in no way, was that a full or partial offset on INCOME TAX.
Progressively, that % VAT has increased over the years and is positioned to hit 20% early in 2011. Again, without any income tax reductions or offsets.
Here in the USA, VAT proponents are “assuming” that a Fed VAT will somehow REPLACE Income Tax. Aficionados have proposed that a National VAT of around 12.50% (maybe 15%) will equate to the amount of revenue collected by the present tax system and be “neutral.”
Folks with low-to-median incomes will still be entitled to some form of year-end rebate and compensatory rebates will be allowed on a broad spectrum of “issues”.
National Governments, worldwide, perceive TAX REVENUES in much the same way as an addict regards cocaine or heroin = ADDICTIVE.
Assuming that the Feds adopt a VAT and ABANDONS direct personal and corporate taxation maybe there is a tangible benefit to citizens. Without that exchange, all we are in for is a MASSIVE tax INCREASE that is unprecedented in scope and scale.
Moreover, “at a stroke” the Government can increase the % VAT in order to fuel an ever increasing budget.