Does America need a federal Value Added Tax?

[BrainGlutton]

Michael Lind & Leo Hindery, LA Times, 05/24/10, say America needs a federal value added tax, which is not quite the same thing as a sales tax:

A value-added tax is a consumption tax, like a sales tax. But because a VAT is collected at each stage of the production of a product, it avoids the problem of “cascading” sales taxes on top of sales taxes. If a sales tax were 5%, then a farmer who sells wheat to a baker for $100 would pay $5 and the baker who used the wheat to sell bread for $200 would pay $10. However, a VAT of 5% on the final sale of the bread for $200 would be collected in portions at each stage of production: $5 from the farmer and $5 from the baker, adding up to $10 in total. Even a narrow-based VAT that exempts necessities like food or children’s clothing can collect large amounts of revenue with relatively low rates, and it’s also a lot harder to “game” or evade than an income tax.

Based on a recent study, they argue this offers advantages over relying strictly on income tax and payroll tax:

Even if, in enacting a VAT, Congress narrowed the base and exempted necessities, a modest VAT could still pay for substantially reducing the current 35% U.S. corporate income tax, with the very positive result that both the cost of doing business in the U.S. and the incentive for offshoring production would shrink.

A narrow-based VAT could in turn also serve to substantially reduce the employer portion of the payroll tax from its current level of 6.2%, which would stimulate businesses to start hiring again. Any Social Security revenue lost in the process could be raised in other ways, such as by lifting the cap of $106,800 on employee earnings subject to the payroll tax. Because most economists agree that employers pass on the cost of the employer half of the payroll tax to their employees, a payroll tax cut would reduce taxes for workers even as it lowers the cost of hiring by employers.

The best approach, however, seems to be a VAT that at the same time reduces both corporate-income and payroll taxes. For example, a narrow-based 5% VAT could be “apportioned” to significantly cut the corporate income tax from 35% to 25.6%, while at the same time slashing the employer portion of the payroll tax from 6.2% to 4.5%.

Replacing growth-choking taxes with a modest VAT could be the basis of a new grand bargain between progressives — who oppose slashing programs that millions of Americans depend on more than ever — and pro-business conservatives, who favor lower corporate and payroll taxes. Progressives need to concede that a good tax system is one that encourages investment, growth and jobs, not one that intrinsically soaks the rich and punishes corporations. Conservatives, in turn, need to concede that additional government revenues need to be raised, preferably by taxes like a VAT that least distort economic decision-making.

Sounds persuasive to me. Do you think it’s a good idea?

[Chronos]

This business of spreading out the tax over the entire chain of sales: How on Earth would you track that? If I pull petroleum out of the ground and sell it to a refinery, and they refine it and sell some of the fractions to a plastics company, and they process it into plastic pellets which they sell to a car-parts supplier, and they shape the plastic into fenders, and sell the fenders to a car maker, I end up paying some portion of the tax on the car? Never mind the fact that some other fractions of the oil the refinery gets will go to places other than the plastic factory, and some of the plastic factory’s pellets will go to someone other than the car-parts company, and so on.
But then there’s the kicker, in the last paragraph:

Progressives need to concede that a good tax system is one that encourages investment, growth and jobs, not one that intrinsically soaks the rich and punishes corporations.

If this tax system is going to bring in the same amount of money as the income tax it’s replacing, but it doesn’t “soak the rich” as much as the income tax does, then the only alternative is that it’s soaking the non-rich instead. And this is supposed to be better?

[rowrrbazzle]

“Need”? We could cut spending, so obviously, no.

If “progressives” don’t want to cut spending, then the OP’s question becomes “Do ‘progressives’ want a federal VAT?” Obviously, yes.

@Chronos

This business of spreading out the tax over the entire chain of sales: How on Earth would you track that?

I’m personally pretty sure that “progressives” regard that as a feature, not a bug.

[Chronos]

rowrrbazzle, what makes you say that it’s progressives that want this tax? It looks to me that the quoted piece is more saying that big business and conservatives want it, and that progressives should just bend over and take it in the spirit of compromise.

[Lemur866]

You don’t track all the entire chain of sales. A business only tracks its own purchases and sales, and pays taxes on the value added. Corporation A pulls petroleum out of the ground and sells it, and pays a value added tax. Corporation B buys the petroleum and refines it and sells it and pays the value added tax. Corporation C buys the refined products and turns it into plastic and sells it and pays the value added tax.

Corporations have to track their sales and purchases anyway, and they pay taxes on corporate profits already. The VAT is just a form of sales tax where you don’t pay tax on the gross sale but only on the net sale. If a store buys a loaf of bread from a bakery for a $2 and sells it for $3, they only pay VAT on the $1 value added. The consumer pays nothing, or rather, the price tag already has the VAT figured in as part of the price of the product.

[bubba_jr]

@Lemur866

If a store buys a loaf of bread from a bakery for a $2 and sells it for $3, they only pay VAT on the $1 value added. The consumer pays nothing, or rather, the price tag already has the VAT figured in as part of the price of the product.

So the consumer pays for it in the end anyways, BUT… we now get to have a whole big mess of added paperwork and people to do the paperwork and probably a bigger better bureaucracy to deal with it all.

Sounds like a fantastic way to stifle production and push more jobs and production over seas.

[Ludovic]

@bubba_jr

Sounds like a fantastic way to stifle production and push more jobs and production over seas.

…to a place without a VAT…wait.

[E-Sabbath]

As I understand it, the lower incomes spend the larger part of their salary. This kind of tax, therefore, is inherently regressive. And pretty painful, especially to people who are hand-to-mouthing it. Gonna make the people below the poverty line pay a lot more in tax over the course of a year. They might get a reimbursement, but that doesn’t compare to the money they won’t have over time.
Compared to, say, not withholding, that is.

[Least_Original_User_Name_Ever]

@bubba_jr

So the consumer pays for it in the end anyways, BUT… we now get to have a whole big mess of added paperwork and people to do the paperwork and probably a bigger better bureaucracy to deal with it all.

Sounds like a fantastic way to stifle production and push more jobs and production over seas.

Unless you’re moving to a country with no infrastructure, they’ve pretty much all got a VAT.

I get it. Taxes are bad. I don’t agree with you, but I get it. However, it’s just not that simple. You’ve got to move past the Pavlovian response of “Taxes? NO!!one!1”

[Snnipe_70E]

My understanding of a VAT is there is also an advantage in exports and imports.

Especally with computers it is not hard or time consumming to calculate what the total VAT on a item is.

The advantage is at export time the VAT is returned to the maker. And at import time a correct VAT is added to the imported item. And it is not a tarriff.

Just pulling numbers out of my head to explain the advantages. Assume a car made in a country with a VAT sells for $25,000 and $10,000 of the is the VAT. When the car is exported the $10,000 is returned. The car arrives at the non VAT country and can be sold for $15,000.

A car made in a non VAT country is sold for $15,000. When exported to the VAT country the VAT is added to the cost of the car and now sells for $15,000.

If the life stiles in the two countries are the same and cost the same little advantage. But because the non VAT country needs money TAXES the car cost more. If the car company has to pay income taxes etc it will have to charge more so now the $15,000 car coswt $25,000 in the home country and $35,000 in the VAT country.

Which country ends up being an exporting country and which coountry ends being an importing country.

Remember it is not a tarriff so we can not at a large tarriff or we get into tarriff wars.

I know this is an over simplification of the VAT but this was the explaination I was given about what a VAT was thirty years ago.

[Chronos]

When the car is exported the $10,000 is returned.

To whom?

[Lemur866]

@bubba_jr

So the consumer pays for it in the end anyways, BUT… we now get to have a whole big mess of added paperwork and people to do the paperwork and probably a bigger better bureaucracy to deal with it all.

Sounds like a fantastic way to stifle production and push more jobs and production over seas.

Is this going to be more paperwork than keeping track of your income for income tax purposes? Or keeping track of sales taxes? Every retailer in Washington state already keeps track of every sale collects taxes for the state and locality, plus they keep track of payments to every employee for income taxes, payroll taxes, and so on.

A VAT entails paperwork, but not more paperwork than existing tax schemes. And most developed countries in the world already have VATs.

Of course the consumer has to pay for it in the end, since we have to pay for amount of government we demand. So we have to collect taxes somehow.

[RickJay]

@Chronos

This business of spreading out the tax over the entire chain of sales: How on Earth would you track that?

In Canada the process (we call it GST) is fairly straightforward; a business owes 5 out of every 105 cents on all its sales, and then deducts 5 out of every 105 on all its purchases. So it’s fairly common for a business to not pay the GST in a period where expenses exceed sales.

Of course, some customers are exempt from GST, so it’s not quite THAT simple, but it’s not a big headache, really. Any decent accounting software will pretty much do it for you.

[Raygun99]

@Chronos

rowrrbazzle, what makes you say that it’s progressives that want this tax? It looks to me that the quoted piece is more saying that big business and conservatives want it, and that progressives should just bend over and take it in the spirit of compromise.

Indeed - progressives generally hate VATs, as they are inherently regressive.

[Snnipe_70E]

@Chronos

To whom?

To the maker of the final product.

[Snnipe_70E]

Another advantage of the VAT as I understand it is when you purchase anything you know what it cost what the VAT was and what the final cost is.

In our system a buyer pays $25,000 for a car. and an additional $2312 in sales tax. The buyer thinks that the $2312 is a lot of taxes. But in reallity how much of the cost of the car is passed along hidden taxes? It is calculated that here in the USA that tax freedaom day is sometime in late May. That is it takes almost half of a persons income to pay all the direct and passed along taxes. We pay taxes without knowing it or how much.

[RTFirefly]

Are you sure you have the right forum for this thread, BG? AFAIK, the VAT isn’t on any U.S. state ballot this year, nor is it likely to be a campaign issue.

[RTFirefly]

@Snnipe_70E

It is calculated that here in the USA that tax freedaom day is sometime in late May. That is it takes almost half of a persons income to pay all the direct and passed along taxes. We pay taxes without knowing it or how much.

This is really quite easy: sum up Federal, state, and local tax revenues for a year, and divide that sum by GDP. That tells you what fraction of a year has to elapse before Tax Freedom Day.

Multiply by 365 to find out how many days into the year that is. Then convert into months and all that.

For instance, last time I looked, those combined revenues were running ~28% of GDP. .28 x 365 = 102.2. If that ratio still holds, then TFD would be in the early hours of April 13.

[Snnipe_70E]

@RTFirefly

This is really quite easy: sum up Federal, state, and local tax revenues for a year, and divide that sum by GDP. That tells you what fraction of a year has to elapse before Tax Freedom Day.

Multiply by 365 to find out how many days into the year that is. Then convert into months and all that.

For instance, last time I looked, those combined revenues were running ~28% of GDP. .28 x 365 = 102.2. If that ratio still holds, then TFD would be in the early hours of April 13.

Last time I heard it quoted as being in the latter part of May.

[BrainGlutton]

@RTFirefly

Are you sure you have the right forum for this thread, BG? AFAIK, the VAT isn’t on any U.S. state ballot this year, nor is it likely to be a campaign issue.

I thought I was posting it in GD.

Mods, please move it there, thanx.