Income Tax outside US

Cecil's Columns/Staff Reports
1

In this column Is a border adjustment tax really just a plain old tariff? - The Straight Dope about border tax and tariffs, Cecil says

I think something got lost there in editing, because nations particularly in Europe use both VAT and income tax. Cecil has mentioned in previous texts about income tax that Europe has a higher one, because we pay more things for the community.

VAT and income tax are not opposites, but rather complementary: income tax is graduated, so low earners pay nothing or 20%, but high earners 40% (or more). VAT is flat, eg. 19% for a Dress or Food at a Restaurant, often lessened with reduced rate for essentials like bread and milk only at 7%. (Flat means that poor People are proportionally hit harder: spending 400 Euros on Food each month if your total income is 1000 Euros is more difficult than if your net income is 3000 Euros).

2

Pretty sure Cecil meant to say sales tax there.

3

No, the sentence makes perfect sense as is, since there is no national level sales tax or VAT or BAT in the US currently. The US relies almost completely on individual and corporate income taxes, as well as payroll taxes. Check out this link: http://www.cbpp.org/research/policy-basics-where-do-federal-tax-revenues-come-from

In the US, sales tax is completely a state thing, although most states also have an income tax.

4

So… the US still has both sales tax and income tax for individuals, of which payroll taxes are simply a pre-payment) and for corporations (which we call different but still Comes out the same)

whereas European countries have VAT tax … and income tax for individuals and corporations.

So where’s the difference?

If you consider the US not as one Country (which would be terribly organized from that Point of view) but similar to the EU a Group of Independent states with some overarching laws from Washington / Brussels, the comparison works better. There is not one same Level of VAT, rather Germany, France, Netherlands etc. all have their own percentage rate - just as sales tax in the US varies from state to state; each EU Country has their own income tax rate and laws (a Portion of which goes to Brussels), same as individual US states.

Therefore, the sentence that EU countries use VAT instead of income tax still doesn’t make sense, because that implies an “or” clause: EU uses VAT, US uses income tax. Obviously, both use both (with the different Terms of sales tax and VAT).

5

I just cut this one part out, because it is where the similarity breaks down. The US Federal Government gets $0 from the state sales taxes. All of it goes to the state. Each state has its own balance of sales/income tax, but that is totally separate from the federal tax system. Cecil’s article is about the establishment of a Federal Level BAT, which has never existed. He is comparing the national tax scheme to that of the individual countries of Europe.

Maybe a better way to word it would have been “rather than only relying on income taxes like the U.S. largely has”. (Bolding is word inserted by me)

6

I know I should’ve worded it longer…

It’s not as simple as “EU member A has gotten X mil. Euros this year from income tax, 20% of which go to Brussels.” It’s rather "EU member Germany has 30% income tax on the average citizen (actually from 20% to >40%), x% of this goes to the state (e.g. Munich), y% of this goes to the federal state (Berlin), and a small part goes to the local community (filtered back from state, I think?)
Of the whole part in Berlin that makes up the federal Budget (partly income tax, partly other taxes) a Portion is set aside for “EU Membership dues” to put it simply.

The size of that is determined by some formula somewhere, based in part on national economy (so some measure like GDP) since Germany pays more than other countries; partly on Population size, partly on … (who knows, I would Need to look it up).

I don’t even know (without looking it up) whether it’s one all-encompassing amoung, or split into several things (like EU subsidies for agriculture, where countries first pay into, and then get paid out off). For those interested, I’m sure a bunch of numbers is published by the EU (but I don’t find it fun to wade through tons of numbers.)

7

There does seem to be more of a breakdown of taxes on individual Level in the US than in European countries, though, e.g. the idea of funding Schools for each community seperately with a seperate tax for land owners only used for Schools, resulting in widening the disparity between poor and rich communities.

That Sounds very weird to Europeans, where taxes are generally put into one General Budget and then portioned out. (hence the complaints of the car Drivers about the gas tax, until it was pointed out that even with raised gas tax, the amount coming in was still many mill. short on what was going out to repair the streets and build new ones.)

8

As most businesses in a production chain are registered for VAT it is a horrendously expensive way to collect money. Someone digs iron ore out of the ground and charges VAT to the steel foundry. The steel foundry claims that VAT back then processes the ore and charges VAT to the steel mill. The steel mill claims that VAT back and turns the steel into angle and charges VAT to the cabinet builder. The cabinet builder claims that VAT back and charges VAT to the computer manufacturer. The computer manufacturer then claims that VAT back and charges VAT to the company that buys their computer. The company that buys the computer then claims that VAT back. The net result is SIX sets of charging and claiming back with a net result of NIL tax received by the government but an army of civil servants required to administer and audit this process.

9

Actually, the complicated process is the result of the name: Value **Added **Tax. The tax tries to charge companies only for the amount of value added by them, by buying raw resoure in state A and selling it in a different state B (iron ore sold as steel; steel sold as angle etc.)

The practical way is that the company buys the iron ore for (invented number) 10 Euros per kilo plus VAT, does its process, and sells the steel for 50 Euros plus VAT
When it bought the iron ore, it paid VAT on that, but can subtract the 19% of the 10 Euros they paid to the mining company from the 19% for the 50 Euros the owe the tax office. This mathematically comes out to taxing the difference between sale price and buying price.

And today, with computers and bookkeeping systems, I don’t consider it that difficult. Any professional company will do extensive bookkeeping not only because Tax law and company law demands it, but because the company wants the numbers for their own cost calculation, and big companies are required to publish their yearly financial statement to the shareholders anyway.

10

It is certainly the case that introducing a VAT is horrendously more expensive than continuing a VAT. But 3 things:

  1. For small business and individual traders, it is expensive and painful.

  2. Enforcement is difficult and expensive.

  3. I cringe every time I see that computers and bookkeeping systems are not difficult for big companies. It’s not true. That stuff is still difficult and error prone. That stuff kills startups, even multi-multi-million dollar start ups with adequate capitol. And just when you think you’ve got it running right, the tax rules change, and Ford Australia (a reasonably big company) is unable to pay their bills, and Ford Japan is notifying them that deliveries will stop until payment happens (I was there).

11

That sounds … strange to me. Granted, I didn’t do bookkeeping for very big companies; but I did bookkeeping for small Business and for mid-size local ones.

We did normal (today) double book-keeping, so “business-owner buys raw material” meant one entry for “raw material account” and one entry for “VAT tax eligible for deduction later”, as printed on the receipt (which said “Raw material, 1 Pound, gross Price 58 Euros, net Price 50 Euros, VAT at 19% 8 Euros”).
And “business-owner sells finished product” was entered once for the “earnings” account and a second for “VAT at 19%” (connected to direct deduction VAT account")
At the end of the fiscal year, for small Business, we pressed a button in our Computer bookkeeping programs that added up all accounts normal deductions (expenses), all gross income (earnings) and “directly withdrawable VAT” was a seperate category.

I only worked in the tax advisors Office for two years, but I can’t remember ever Hearing about a case where the law changed and was so confusing that companies big enough to employ their own bookkeeping dept. got into Trouble with it.

There was a scandal with McDonalds many years back: but the Courts ruled that it was deliberate tax fraud. The case was: in Germany, eating Food in a sit-down Restaurant falls under normal stuff and thus normal VAT rate, 19% (or maybe only 14% back then).
But Food-to-go falls under “essential stuff” and thus reduced rate of 7%.* Therefore, the cashiers at McDonalds were required to ask the customer “Eat here or to go?” and press either the 7% or 14% button on their Register depending on the answer.**
But when the tax Office checked the numbers, they were surprised that almost nobody used sit-down in McD, only take-out, but a cursory glance showed the Restaurants rather full of sit-downs.
When they dug deeper, they found internal memos from the top telling cashiers to ask the question and then press the 7% button regardless of the answer; so McD was making the customers pay 14% for sit-down, but making up lower numbers for sit-down and pocketing the difference.
And that was, the court decided, obviously deliberate fraud.

  • Along with this case was a public discussion on the logic about why some things are reduced and very similar things are normal VAT. The Basic priniciple is easy enough - Food for daily life like milk and bread is reduced, so People can afford it; books are reduced to encourage education; everything else is not strictly necessary, so People can afford to pay normal VAT. But it’s the Details that were added on for certain things where the devil is.

** Customers who said “To go” and then changed their mind and sat down would not have been the fault of McD. A lot of other Restaurants have different Prices for take-away and sit-down Food, though, not because of tax, but because of rent, waiters etc. for sit-down Food. So call-a-Pizza places usually offer 10% off if you collect instead of having delivered. Gelaterias sell to-go icecream for 1.20 Euro a Scoop, but sit-down is three Scoops for 5.40 Euros, and a sign “Please don’t eat to-go icecream at the sit-down tables”. But it’s internal cost calculation, not VAT reason.