Tax Planning
A National Sales Tax Could Be Coming
A VAT is levied at each step of production, but you foot the bill.
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, October 2010
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Eric Toder is a fellow at the Urban-Brookings Tax Policy Center, in Washington, D.C.
Please explain how a Value-Added Tax works. It's basically a consumption tax -- like a retail tax. But it's collected from every business along the production chain, with each business getting a rebate for the tax paid at the previous stage. Take the sale of bread. Imagine the farmer is selling a quantity of wheat at $300, plus a 10% VAT. The miller pays $330 to the farmer. The miller incurs $400 in costs to grind the wheat, so the 10% VAT adds $40. The baker incurs another $300 in costs, resulting in $30 of VAT, so the final cost of bread to consumers becomes $1,100 -- $1,000 for the loaves, $100 for the VAT.
Why is a VAT being touted as a way to reduce our enormous deficits? Given the government's commitments to provide retirement and health benefits, the spending cuts required to balance the budget would be Draconian. On the revenue side, we have a flawed income tax with lots of preferential treatment and high taxes on corporate income. If we are serious about deficit reduction, we will have to retain an income tax along with any VAT. But some VAT revenues could be used to reduce income-tax rates or to increase exemptions so that fewer taxpayers file income-tax returns.
Would a VAT stifle spending just when the economy needs it most? We don't want to raise taxes now, given the high unemployment rate. But that will change, and we have very-long-term debt problems.
What's a reasonable VAT rate, and what should be subject to a VAT? You might start at 5% and ramp up to 10%. Often, food consumed at home and medical care are exempt. Housing could be exempt, and so could education. The fewer things that are exempt, the more revenue raised at a lower rate, and the less complex the tax.
Isn't a VAT a little sneaky? It's easy to impose or hike because people don't notice it. A VAT can be made visible if policymakers so choose. I lived in New Zealand just after a VAT was enacted. Every time I saw a price -- in a shop or on a restaurant menu, there was a notice that the tax was included. Everyone knew that they were paying more because of it. But people may be less resistant to a tax, even if it's visible, that is simply part of the price they pay for goods.
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Reader Comments (6)
Posted by: bigfishh at 09/08/2010 01:45:47 PM
Raising taxes should not be the first approach. The same irresponsible legislators who brought us the housing bubble, the GM bailout, and federal healthcare have shown they cannot limit their spending to tax receipts. More taxes will just result in more spending. We have a deficit of over $1 trillion and much of this was caused by increased spending. Why did the so called "one time stimulus" create structural deficit of over $1 trillion per year? We need to fix the spending side before considering any changes to the tax code.
Posted by: niceguy2931 at 09/08/2010 03:48:58 PM
Every person who visits this country will also pay the tax and should not receive a rebate as I do not when I visit their country.
Posted by: Dan Stark at 09/08/2010 05:24:13 PM
A VAT is a fairer tax than the current income tax. Everyone would have some "skin" in the game again instead of an "entitled" 47% that pay no income tax currently. Lot's of issues with things like the "untouchable" deductions...Charity, home mortgage, etc. What this congress would try is BOTH...the Americam people would not accept that....they are fed up with the career congressmen & their out-of-control spending.
Posted by: dcrosetti at 09/09/2010 08:03:07 AM
The vat tax is not the first step to reducing deficits. The first step is to reduce spending. The incompetent people that are currently making decisions in Washington, do not realize that they are turning this country into a version of France under Marie Antoinette. We have the Sun King, Barak Obama and his Sun Queen, Michelle. When we complain about their excess, they basically say, "Let them eat cake." We need a good old fashioned revolution and that is coming in November. Stop spending. Stop welfare programs. Stop robbing my children and grandchildren. Apply every law that congress makes, to congress. Enough already.
Posted by: Frank B at 09/10/2010 09:19:30 PM
Wars which are failures on borrowed $$$ are the big reason on why we have a huge deficit... Issue one, the war in Iraq has destroyed thousands of lives and its costs have burgeoned to a trillion dollars. For what, we looked for weapons of mass destruction and found none. This war probably flunks a constitutional test When we leave Iraq, Iraqis will govern themselves like they want: and never will be a trusted friend like Canada or Israel. Thank you George Bush... Issue two, the war in Afghanistan looks as if it will go on until the Afghans tell us to leave; and if we dont leave when they tell us to they will toss us out as they did, the Russians, British and Greeks. Thousands of lives destroyed and a trillion more dollars wasted . Bin Laden is in Pakistan which makes this war a failure! Thank you George Bush....Issue three, the war on drugs is a total failure , even FOX news reported On May 13 2010, that the war on drugs has met none of its goals. No decrease in users, supplies are plentiful and the potency of the drugs has increased. The cost to the country is trillions of dollars over the past forty years . Thank you Nixon and Reagan.
Posted by: Tom at 10/06/2010 12:38:32 PM
I would guess that Frank B. is a democrat, or worse, a liberal. Well, if BHO gets his way, when he's finished, ALL republican presidents will look like saints.