Sep
4
Written by:
Dr. Ernie Moore
Saturday, September 04, 2010
Charles Krauthammer says it is almost certain that after the elections the Obamanation will try to put a VAT (Value Added Tax) on America.
Israel and much of Europe has such a tax already. Perhaps you have never heard of this tax. We offer more information below, and tomorrow a more extensive description, examples, and lots more courtesy of Wikipedia.
In the mean time, read the RIDICULOUS story below of New York and the sale of bagels and the taxes thereon.
Article from Heritage Foundation:
Washington think tanks and commentators continue to spin out impressive reams attempting to explain the necessity and virtues of adding a value-added tax (VAT) on top of all the taxes the federal government already collects. The fiscal policy problem is real enough—thanks to the Obama spending surge, federal budget deficits are unsustainable and a course correction is inevitable. What most VAT-istas refuse to acknowledge is that the problem is due to new spending, not a sudden collapse in the ability of the federal tax system to raise revenues. Even so, it’s not always easy to explain why the VAT is the wrong answer. In this the city of New York has rendered notable if unintended assistance.
Under the tax laws extant in the Big Apple, if a bagel is sold whole, then it is, well, a bagel. But if the bagel is sliced before it is sold, then it falls under the category of “processed foods.” And processed foods are subject to a higher tax—a nine cent higher tax, to be specific. Since New York City has already spent its way to fiscal oblivion while driving taxpayers out of the city with punitive taxes, this nine cents of tax is suddenly critical to the city’s financial survival. And so the New York Department of Taxation and Finance wants its nine extra cents, hold the lox.
This might be a funny story of the absurd, but it’s not a rare story to anyone who’s dealt with European VATs. These VATs, in effect national retail sales taxes, have been around for decades. From the beginning and over the years all manner of special rates and exemptions have been added to massage the costs and purchases of the nation’s consumers. Want a biscuit with your soup? The tax is one amount. Buy the biscuit wrapped separately and you pay a different amount. All times millions of products times millions of transactions daily.
It’s not that the income tax is pure. On the contrary, it’s a mess. But those who are pushing a pure VAT are living in a fantasy land if they think the United States Congress is going to enact a nice, clean VAT, free of special tinkerings, rates, and exemptions for such things as food, medicine, education, shelter, telephone service, electricity, heating oil, and on and on. The VAT would offer a whole new realm for Congress to play with other people’s money—and a whole new opportunity for lobbyists to ply Washington to manipulate those rules. New York’s silly bagel rule is just a slice of what would be to come.
View article...
VAT (fm Wikipedia) Example
Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel.
[edit] Without any tax
- A widget manufacturer spends $1.00 on raw materials and uses them to make a widget.
- The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20.
- The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30.
[edit] With a North American (Canadian provincial and U.S. state) sales tax
With a 10% sales tax:-
- The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.
- The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
- The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.15, leaving the gross margin of $0.30.
So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.
[edit] With a value added tax
With a 10% VAT:
- The manufacturer pays $1.10 ($1 + ($1 x 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10.
- The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 x 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 - $0.02 - $1.10 = $0.20)
- The retailer charges the consumer $1.65 ($1.50 + ($1.50 x 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 - $0.03 - $1.32 = $0.30).
With VAT, the consumer has paid, and the government received, the same as with sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.
The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.
For more on the VAT you can open the article that more extensive tomorrow.