Nice explanation.

I don’t like to consider myself ignorant on such matters, so I appreciate learning how it actually works

A question, though. Clearly your argument for the VAT is not in addition to the income tax, but instead of. How does this compate to the FairTax? Isn’t it the same thing under a different name?

My only real familiarity with VAT is from the fact that it is used in Europe, if I recall correctly, on top of their other taxes.

If you mean basically the same thing as the FairTax, would it be easier to call it as much, to avoid the negative connotation that comes with the VAT? After all, VAT in current discussion is not being considered as a replacement of current tax code.

So far it looks the same. The error is in the next step. You DON’T need to sell the product at $1,560 to keep your margin. INSTEAD, you sell it at the same $1,430, and collect a VAT of $143. THEN you subtract AND KEEP the $90 of VAT you paid, sending only $53 to the tax collector. So now you are only out of pocket the original $1,000, and you have maintained your 30% margin.

It looks to me as if the seller here will collect $1430 + $90 + $53 = $1573, which is worse than selling for $1560. Out of that $1573, he gets to keep $1520, which reimburses him for the $90 in VAT he’s already paid, essentially leaving him with the $1430 he used to collect and a 30% margin on his original $1000. That sounds very neat, but the fact is the price to his buyer has jumped to $1573, and his volume will go down. That means a loss in his standard of living. And if income taxes remain in place, he’ll still be paying the same income tax per item that he was before, while selling fewer items.

Or, did you mean that the price would remain $1430, out of which the seller would extract $53 to pay his stage’s VAT? If so, that leaves him with only $1377, $90 of which is supposed to cover his $90 in VAT previously paid to his supplier. In reality, this would mean that instead of his usual $1430 received after a sale, he’d have only $1377 – $90, or $1287. Why subtract the $90? Because he’ll have to set that aside to pay the VAT on receipt of his next delivery of supplies and materials. It can’t be spent as long as he remains in business at the same volume.

His margin on sales has now dropped to $287/$1430, or 20%; it didn’t remain at 30%. What it also means is that he is paying a tax of $143 (the VAT) on a profit of $287, or 50%. Or $90 on $287 (31%), or $53 on $287 (18%). Obviously, it there is an income tax to be paid as well, the government is making all the profit while the businessman is doing all the financing and work. Also obviously, not all of those can be correct from an accounting or logical standpoint, so I suspect the first example above is the correct way to look at this.

No matter which is true, the VAT is an economy killer, just as the income tax is. With a VAT, the cost to each BUYER at each level of the production-distribution-sales chain is more than it was before. The fact is, any additional tax hurts the economy. Any increase in the size of government hurts the economy. That’s why reducing income tax rates and reducing government spending was so successful during the Reagan years, and why the Reagan compromise which resulted in higher tax rates was a mistake. And it’s why tax rate reductions combined with government spending reduction is the only true solution to out-of-control deficits. Higher tax rates and taxing more items make deficits worse, not better.

Furthermore,

Item 1.

I agree, but the same would be true for a point-of-sale tax.

Item 2.

The VAT taxes consumption rather than production

Maybe, but until the sale the producers have to finance the tax that has already been paid to the government. If the item doesn’t sell, the final seller has to eat all the tax because he’s already paid it. VAT is a production tax that is converted into a consumption tax only at the point of final sale. It increases the cost of business at each level of the chain because its effect is to increase the cost of everything necessary to carry on a business. It is as if the government were actually Vinnie the Enforcer, standing by each transaction to get his cut up front, while adding no value whatsoever to the deal. Does the word “protection” ring a bell? The fact that the final consumer ends up paying the tax is irrelevant to the way business must be conducted. The VAT raises costs and therefore it raises prices and therefore by necessity it stifles the economy. Eliminating the income tax is another matter.

Item 3.

However, a European car manufacturer receives a refund of all VAT taxes paid in production, and is not subject to any income tax. Thus, the European value of a car imported to the U.S. goes untaxed. This is one reason for moving manufacturing jobs overseas.

Not true. They do pay income tax to the country of origin. And jobs migrate overseas because the cost of labor is lower, not because of the VAT.

Item 4.

I agree. I don’t know whether this is a point in favor of the VAT and against a simple sales tax, or vice versa, but the VAT makes it difficult to “exempt” particular items from taxation. You would pay VAT on the purchase of a new home. On milk and bread. On medicine. You decide it that is good or bad, but it isn’t a problem with a point-of-sale tax.

Item 5.

A VAT is transparent in its impact…. Thus the buyer clearly sees how much of his or her money is going to taxes

Not completely accurate, because it ignores the additional cost imposed on business to finance their share of the tax until it is paid, as explained in Item 2 above. This increases the cost of business, and in fact may increase the amount of the tax.

Item 6.

No quibble.

Item 7.

A VAT can be used to advantage “good” products and disadvantage “bad” products (think vegetables vs candy)

Perhaps true on the margin, but very difficult and complex to do, as noted in Item 4.

Item 8.

Some implementations of VAT do not require small vendors to register and pay.

Isn’t that a big, fat hole in the “equal taxation for all,” “easy to administer,” and “difficult to cheat” arguments? I can see John Conyers and Chris Dodd having a field day by doling out those “small vendor” exemptions.

This conversation points out just how intricate, complex, and confusing the implementation of a VAT would be. Nobody who lives under one likes it. The fact that the VAT has exceeded 25% in some countries, in addition to an income tax, should tell us something. Plus, the complexities of the VAT (which don’t come up in these discussions) necessitate that a vast government bureaucracy must exist to administer it, collect it, and enforce penalties for evading the tax.

I remain opposed to a VAT, but open to a sales tax IF AND ONLY IF the income tax were to be repealed first or concurrently, along with the amendment that permitted the income tax in the first place. That repeal is nigh onto impossible, so we must fight mightily to prevent any kind of VAT, Fair, or sales tax from being implemented.

We need less government, not more taxes.

For their clothes, bling, and cars.

“A nation which can prefer disgrace to danger is prepared for a master, and deserves one.” –Alexander Hamilton

Study at Redstate University

Forgive me for using Wikipedia.

“The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference, in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.”

VAT

The should be there is a couple of places. Also, I have to get back to work now, so I hope I have said enough.

http://www.heritage.org/Research/Reports/2005/05/Beware-the-Value-Added-Tax