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Kamal Adeni - VAT Federal Deficit Buster ?
1. VAT A Deficit Buster? There is a lot of chatter about VAT and currently VAT is being offered as a possible solution to cut the US Federal Deficit. To understand if this holds water, we need to understand what VAT is and how it currently works in EU and other countries. Then we can have a discussion if this is viable solution. By KAMAL ADENI September 5, 2010
10. Several developed countries such as Canada, New Zealand, Australia, and United Kingdom levy VAT
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12. How Does VAT Work? - Australia Source: Commonwealth of Australia: http://www.fahcsia.gov.au/about/overview/Pages/CopyrightDisclaimer.aspx
13. How VAT works in EU Value Added Tax (VAT) is a consumption tax of up to 25% that is levied on both goods and services in most countries around the world. The national tax systems of Europe, Japan, and Australia and others often allow for a refund of VAT to non-resident business entities worldwide. For VAT claims that are not Travel and Entertainment expenses, registration for VAT may sometimes be required prior to the transactions in order to get a refund. Source: Euro Vat
16. A German company (A) purchases and sells computer products from and to German companies. Below is a description how the VAT tax works for this company (A):
17. Purchase from a German vendor (C) Computer parts Euro 100.00
26. *VAT is not a cost to the company(A). It is accounted for on a Balance Account.**The customer(B) can deduct the VAT if they are a company, registered for VAT. Their cost is then 200.00.
27. VAT Return filed to the German Tax AuthoritiesThe German company(A) declares to the German tax authorities:
38. The company’s Profit & Loss is not affected by the VAT. Only the cash flow.Source: Euro Vat
39. What is Input Credit? Businesses are eligible for input tax deductions on invoiced VAT for deliveries and services that they receive from other businesses. However, it must be noted that input tax deductions are only possible for separately invoiced VAT. Taxpayers are required to be registered to be eligible for ITC
43. Are All Vat tax structures the same? Vat is not uniform. Different countries have adopted VAT to their needs. In EU certain goods and services are exempt such as postal services, medical care, lending, insurance, gambling and it also depends on the EU members ability to pass legislation to tax certain services. In countries such as Norway, Iceland, Denmark, Sweden and Finland services such as education, hotel stays, health and dental care, dance events, gyms, travel services, and other may be subject to VAT depending on the country. In Canada VAT is at the federal level (GST) as well as at the Provincial level (PST). In addition, certain provinces have gone HST ( Harmonized)
44. Can VAT be imposed at Different Rates? Yes VAT is usually applied at different rates to different transactions, especially in Europe For example: different rates of VAT are allowed in different EU member states. Belgium: Max 21% reduced rate of 12%, 6% or 0% may apply Finland: Max rate 23% a reduced rate of 13% or 9% may apply to certain transactions. England: 20% as of January 1, 2011 Brazil: Federal tax 12% state level tax 25% ( structure is similar to Canada) Canada: 5% GST, a combined rate ( HST ) could be as high as 13%
45. Do we have a VAT in the United States? No. We do not have VAT in the USA, But we have something similar at the state level – Sales tax. VAT would be like a national sales tax except that it is imposed at every level of production instead of at the point of sale. Business get to pass on the VAT at each level to the final consumer and at the same time business can take a credit for the tax paid to their supplier. VAT sounds very complicated but it is not and this tax structure is a very efficient method of raising tax revenues.
46. CASE FOR VAT An Estimated 50 to 60% of the US economy is fueled by consumer spending. VAT is a highly efficient tax from an economic point of view. It's essentially a flat consumption tax, and the way it's collected minimizes compliance problems. The following are some of the benefits: Selective levying to reduce the deficit. Funding the sagging infrastructure Funding for Social Security, Medicare and Medicaid.
47. Why VAT? In the current tax structure to pay for the increased federal spending we have the following options: Raise federal tax rates both for corporations and individuals. Broaden the tax base so as to exclude all the current tax loop holes we currently have. Impose a new broad base tax such as VAT.
48. Why not raise the tax rates? Several economists feel that to raise sufficient tax funds to pay for the Federal spending the tax rates for both corporate and individual income should be increased significantly. In addition, both the tax categories are riddled with loopholes. Also significantly raising the corporate and individual tax rate at the same time simultaneously could have negative consequences on the economy, especially since we have the one of the highest corporate tax rates in the world.
49. What is the downside to VAT? VAT could slow the economy by increasing the consumer prices. Fixed Income retirees could suffer the most. VAT could enable the Congress and the Senate to go on a spending spree. VAT could be used to fund additional social programs
50. Can a VAT be imposed at both Federal and the State level? Yes. Canada does this Canada imposes a Goods and Services Tax (GST) and the various provinces impose a (Provincial Sales Tax) at the province level separate and independent from the GST .
51. What is the Alternative? The Alternative is to cut all Federal spending to zero and this is not a viable option. There is no alternative. Either a VAT or a flat tax is needed to pay for entitlements. To reduce the Federal deficit -We'll need both spending cuts and tax increases. Since we are consumption based economy VAT is needed to curb consumption of certain commodities such as Oil. VAT has been used successfully in several countries to raise tax revenue
52. What government spending should be cut? To understand what spending to cut we need to take a look at the budget where the money comes from and where it goes.
53. 2009 Budget SOURCE: White House Office of Management and Budget; GRAPHIC: Wilson Andrews, Jacqueline Kazil, Laura Stanton, Karen Yourish - The Washington Post
54. Spending Cuts: In addition to imposing VAT, the following changes need to be address to reduce the federal deficit. The income tax system needs to be simplified both at the corporate level and the individual level. Cut discretionary spending to ZERO. Eliminate all taxes including VAT , social security taxes, Medicare tax for anyone making less than 40K Eliminate the federal pension plans and convert the pension plans to 401K plan. Reduce the size of several federal agencies. Eliminate the social security benefits to retirees making over 250K Eliminate Medicare to retirees making over 250K
55. Other Tax Changes: Eliminate the cap on payroll taxes and make payroll withholding below 40K to zero Eliminate the tax loopholes for corporations Reduce Corporate income tax rate to 10% . Impose a 16% VAT on all income above 40K and no deductions Impose a 20% VAT on income over 10MM
56. Other Changes Necessary to reduce the Deficit Allow American citizens to buy prescription drugs from Canada and other countries, especially Medicare participants. Auction off Amtrak to a private company Remove troops from all foreign countries such as South Korea, Japan etc., Auction off the postal service to FedEX and UPS. (Split the country in zones and auction off the postal service assets) Both political parties have to come together to make the hard and painful changes in the tax structure.
57. How high could VAT rates go? Several economists suggest that the VAT rate needs to be as high as 16% to raise enough tax revenue to fix the federal deficit.
58. Conclusion: Imposing VAT without radical federal spending cuts does not make sense . There is a severe downside that most conservatives are concerned about and that is a new structure may be imposed without any drastic spending cuts and this imposes an additional burden on the taxpayers. VAT if imposed should be selective and should target funding of entitlements. Once the funding level for the entitlements is achieved the VAT rate should be cut or eliminated. Bottom line, our tax structure is burdensome and outdated. By simplifying the tax structure and imposing VAT it is possible the underground economies revenues can be taxed. VAT is not a cure all and will not be a cure all for the exuberance of the federal government but given all the options, this is a short term fix for our long term ills. We can only cure our disease by eliminating our federal deficits.
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