A trial balloon rose over the nation's capital last week when the Washington Post reported advisers within the Obama administration and members of Congress are discussing the merits of a national value-added tax to pay for health care and cover ever-expanding budget deficits.
Value-added taxes are levied on the transfer of goods and services, and are paid by the consumer. They are, essentially, a tax on every commercial transaction. As such, the final user will find the cost of any particular item will increase at least by the amount of the tax. Unlike a retail sales tax, which is charged only at the final point of sale, a VAT is collected as goods move through the production and distribution system.
Recently approved increases in government spending have pushed next year's budget deficit to more than $3 trillion, and the administration projects regularly spending $1 trillion more than it takes in over the next 10 years. At the same time, the president has promised to extend health care to millions of Americans. Proposed hikes on taxes paid by the wealthy won't come close to covering the costs.
Though once rejected as politically unpalatable, Democratic policy-makers have a new interest in a VAT. It would raise huge amounts of money off the hundreds of millions of individual commercial transactions the federal government now does tax.
Governments have legitimate and essential functions that require one or more revenue streams. So when discussed only as theory, no tax scheme is either good or bad. The problems arise in their application. Under the current circumstances, we see great opportunity for mischief if this idea becomes law.
Proponents of the VAT point out the United States is one of the few modern industrial countries that doesn't have such a tax. The VAT had its origins in France in the 1950s, and the rest of Europe has adopted it in one fashion or another. It has funded the generous social service network in those liberal democracies.
As popular as those benefits might be, the VAT is not universally loved by its beneficiaries. In Canada, the VAT is known as the Goods and Services Tax, or GST. Wags there say GST stands for "gouge and screw tax."
In most countries, the VAT has augmented, but not replaced, the income tax system. To one degree or another, the VAT combined with an income tax would allow the feds to collect not only on every dollar you make, but also on every dollar you spend - a truly comprehensive system of taxation.
Critical issues that would determine the VAT's impact on the treasury and on consumers include the tax rate and the possible exemption of some vital goods to lessen the effect on the poor. Both would be tricky issues rife with opportunities for political manipulation.
Proponents cited by the Post said a 10-14 percent VAT would raise enough money to exempt those earning less than $100,000 from the income tax. A VAT of 25 percent would allow the income tax rates of the remaining taxpayers to be reduced, but not eliminated.
Both statements are probably optimistic, if for no other reason because once Congress taps into such a rich source of funding it will find additional needs to fill and spend more and more. An initial rate of 10 percent could quickly become 15 percent, 25 percent or more. We would be surprised if many saw their income tax burden decline.
A VAT would add more than just a financial burden on those who sell products or provide services. It would make every seller a tax collector. The farmer selling hay would have to record the transaction and collect the tax for the Internal Revenue Service. We can't imagine the bureaucracy that would be required.
On its face, a VAT would hit farmers particularly hard. The already hefty cost of inputs would be increased by the cost of the tax. Farmers, who have fewer opportunities than manufacturers and retailers to increase the price of their products, would be unable to pass these additional costs on to their customers.
We think a re-evaluation of the country's finance system is probably overdue. Such a review, however, shouldn't begin with a premise that spending must be unlimited in scope and purpose. If spending could be brought under control, perhaps a VAT could be used to offset other taxes in a new, comprehensive system.
Until then, a value-added tax is too dangerous a weapon to be wielded by the current administration and Congress.
Source
Showing posts with label Vat. Show all posts
Showing posts with label Vat. Show all posts
Monday, July 6, 2009
Monday, June 29, 2009
Cato Scholar Urges US Tax Reformers To Resist VAT
A value-added tax system will not be the magic bullet that simplifies the US tax system while increasing revenues, as proponents of a federal consumption tax have suggested, according to a critique of the idea by Dan Mitchell of the Cato Institute.
Writing in the Wall Street Journal in response to renewed interest in consumption taxes in Washington as part of the wider debate on US tax reform, Mitchell argues that the evidence from Europe, where VAT systems have been in place for many decades, is not encouraging from the point of view of reducing both tax complexity and the overall tax burden.
“The classical argument in favor of a VAT says that it's desirable because it has a single rate and is based on consumption,” Mitchell writes. “It is true that single-rate systems (assuming a reasonable rate) are less harmful than discriminatory regimes with "progressive" rates. It's also true that a consumption-based tax would not inflict as much damage as our internal revenue code, with its multiple layers of tax on income that is saved and invested. But these arguments only apply if a VAT replaces the current tax system -- which is not the case here. And the evidence from Europe suggests it's not a good idea to add a somewhat-bad tax like the VAT on top of a really bad tax system.”
Mitchell notes that prior to the mid 1960s, before the advent of VAT in Europe, the average tax burden for the advanced European economies (commonly referred to as the ‘EU 15’) was just under 28% of gross domestic product (GDP) – a similar level to the US tax burden at the same time. By 2006, with VAT firmly entrenched across the European Union at rates of 15% or more (the legal minimum rate set down by the EU VAT Directive) the tax burden of the EU 15 had grown to a little under 40% of GDP. By contrast, the US tax burden had remained fairly static at 28%.
Mitchell also rejected the notion that VAT can increase the tax take without higher taxes on personal or corporate income, again pointing to Europe where taxes on income and profits consumed 8.8% of GDP in Europe in 1965 and 13.8% in 2006.
“The income tax system we have today is a nightmarish combination of class warfare and corrupt loopholes,” Mitchell writes. “Adding a VAT does not undo any of the damage it imposes. All that happens is that politicians get more money to spend and a chance to auction off a new set of tax breaks to interest groups. That's good for Washington, but bad for America."
The idea of a national consumption tax briefly formed part of the debate when President George W. Bush was putting together his bipartisan panel to study options for fundamental tax reform, but did not emerge as one of the final proposals.
The Bush panel came up with two broad plans for tax reform which would have reduced the number of income tax brackets, somewhat simplified corporate and investment taxes and abolished the alternative minimum tax, although the panel’s report was quietly shelved after the Democrats gained a majority in Congress in 2006. However, for many tax reform advocates, the proposals did not go nearly far enough.
The last major round of tax reforms in the US was the Tax Reform Act of 1986 under President Ronald Reagan. But this work seems to have been largely undone by successive administrations and Congresses; there have been more than 3,250 changes to the tax code since 2001 alone - an average of more than one a day.
President Barack Obama has established his own tax reform panel which is due to report back by the end of 2009. Led by former Federal Reserve Chairman Paul Volcker, the only restriction placed on this panel’s remit is to ensure that its proposals do not increase taxes on those earning less than USD250,000 per year. However, it is expected that the Obama panel’s focus will be as much on efforts to close the ‘tax gap’ as on simplifying the tax code, although one of the President's pre-election pledges was to dramatically simplify the act of filing a tax return for the vast majority of individual taxpayers.
It is likely that a national consumption tax will be re-examined during the Obama panel’s deliberations. Indeed Senate Budget Committee Chairman Kent Conrad recently told the Washington Post that VAT must be “on the table” as part of the latest tax reform debate.
.
Writing in the Wall Street Journal in response to renewed interest in consumption taxes in Washington as part of the wider debate on US tax reform, Mitchell argues that the evidence from Europe, where VAT systems have been in place for many decades, is not encouraging from the point of view of reducing both tax complexity and the overall tax burden.
“The classical argument in favor of a VAT says that it's desirable because it has a single rate and is based on consumption,” Mitchell writes. “It is true that single-rate systems (assuming a reasonable rate) are less harmful than discriminatory regimes with "progressive" rates. It's also true that a consumption-based tax would not inflict as much damage as our internal revenue code, with its multiple layers of tax on income that is saved and invested. But these arguments only apply if a VAT replaces the current tax system -- which is not the case here. And the evidence from Europe suggests it's not a good idea to add a somewhat-bad tax like the VAT on top of a really bad tax system.”
Mitchell notes that prior to the mid 1960s, before the advent of VAT in Europe, the average tax burden for the advanced European economies (commonly referred to as the ‘EU 15’) was just under 28% of gross domestic product (GDP) – a similar level to the US tax burden at the same time. By 2006, with VAT firmly entrenched across the European Union at rates of 15% or more (the legal minimum rate set down by the EU VAT Directive) the tax burden of the EU 15 had grown to a little under 40% of GDP. By contrast, the US tax burden had remained fairly static at 28%.
Mitchell also rejected the notion that VAT can increase the tax take without higher taxes on personal or corporate income, again pointing to Europe where taxes on income and profits consumed 8.8% of GDP in Europe in 1965 and 13.8% in 2006.
“The income tax system we have today is a nightmarish combination of class warfare and corrupt loopholes,” Mitchell writes. “Adding a VAT does not undo any of the damage it imposes. All that happens is that politicians get more money to spend and a chance to auction off a new set of tax breaks to interest groups. That's good for Washington, but bad for America."
The idea of a national consumption tax briefly formed part of the debate when President George W. Bush was putting together his bipartisan panel to study options for fundamental tax reform, but did not emerge as one of the final proposals.
The Bush panel came up with two broad plans for tax reform which would have reduced the number of income tax brackets, somewhat simplified corporate and investment taxes and abolished the alternative minimum tax, although the panel’s report was quietly shelved after the Democrats gained a majority in Congress in 2006. However, for many tax reform advocates, the proposals did not go nearly far enough.
The last major round of tax reforms in the US was the Tax Reform Act of 1986 under President Ronald Reagan. But this work seems to have been largely undone by successive administrations and Congresses; there have been more than 3,250 changes to the tax code since 2001 alone - an average of more than one a day.
President Barack Obama has established his own tax reform panel which is due to report back by the end of 2009. Led by former Federal Reserve Chairman Paul Volcker, the only restriction placed on this panel’s remit is to ensure that its proposals do not increase taxes on those earning less than USD250,000 per year. However, it is expected that the Obama panel’s focus will be as much on efforts to close the ‘tax gap’ as on simplifying the tax code, although one of the President's pre-election pledges was to dramatically simplify the act of filing a tax return for the vast majority of individual taxpayers.
It is likely that a national consumption tax will be re-examined during the Obama panel’s deliberations. Indeed Senate Budget Committee Chairman Kent Conrad recently told the Washington Post that VAT must be “on the table” as part of the latest tax reform debate.
.
Subscribe to:
Posts (Atom)