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Would a VAT be good or bad?

In Tuesdayís Dealer Outlook, I speculated that President Obamaís debt and deficit commission is likely to recommend the imposition of a value-added tax ó also called a goods and services tax (GST) ó as a solution to the nationís debt and deficit crisis.

I also noted why the commission could embrace a VAT when it makes its recommendations after the November elections. (Thanks to those who have commented so far, both pro and con.)

So how does a VAT work? Basically, value-added is described by economists as the money a business gets when it sells goods and services, less whatever it paid for materials and/or services. Hereís an overly simple example: If a resin maker sells materials to a boatbuilder for $1, the boatbuilder sells the finished boat to a dealer for $2, and the dealer, adding electronics, prep and delivery, etc., sells the boat to a boater for $3, each of the businesses has added value of $1. So the value of the boat ($3) is the sum of the value-added at each point in the chain. If the VAT is, say, 10 percent, a total of $0.30 tax would have been collected along the chain.

In truth, the VAT does about the same as a retail sales tax. So you might be thinking, wouldnít it be easier for Congress to just impose a 10 percent sales tax at retail? Then the boat dealer would just add 10 percent to the price of the boat. Yes, it might be easier, but it probably wouldnít go over big with the voters back home.

A 10 percent tax on value-added could be much easier to sell because itís not so obvious. Back to our example. The resin maker raises his price to $1.10, the boatbuilder raises his price to $2.20 (reflecting both the tax and the higher price of resin), and the dealer ups it to $3.30. No matter how you do it, the consumer pays the same 10 percent more at the end but doesnít see it.

Proponents will likely point out that, besides being less obvious, some tax experts contend a VAT collected all along the production chain is better for overall collections because a retail sales tax is often easy to avoid. Still others will point out that a VAT is like a sister idea to the flat tax championed by some. In addition, those favoring a VAT say itís the best way to generate revenue to keep up with a government thatís long on giving benefits and short on finding ways to pay for them.

On the flip side, those who would oppose a VAT will loudly label it unfair. Even though the tax is the same for everyone, rich or poor, the poor will clearly be paying a higher percentage of their income. More opposition can be expected from those who say the size of government should be reduced and that a VAT would be a growth hormone. And the flat tax clan will lobby against a VAT primarily because flat taxers want to replace the current tax system, while the VAT would be an addition to our tax structure.

Finally, the VATs in Europe are complicated. They contain a variety of exceptions ó food, for example, as well as many other products with VAT rates lower than the main rate. That causes the main rate to be pushed higher (25 percent in Scandinavia) to make up for the products taxed less so the overall target revenues are still realized.

So is a VAT good or bad? Itís actually neither. Itís just a tool to raise revenues. How itís applied and, therefore, its relation to all other taxes already on the books is what will define it. That will be the battle ground. But be aware that regardless of the details, and even though the burden of the VAT ends up on the final customer in the chain, if it comes it will be all the businesses in the supply chain that will have to shoulder all the compliance obligations, penalties and work.


13 comments on “Would a VAT be good or bad?

  1. Free thinker

    Raising prices across the board on goods is just a bad idea in a down economy. We all have seen and felt what happen to this country when people did not spend money just less than two years ago. Not only will americans be spending 10% more on products but what will it do to our exports?

    I’m all for less gov. Let’s start reducing our size of our military. Do we really need a base in Japan?

    As a family we start to cut out things that we could live without and keep the stuff we can not live without. We can’t live without health insurance and a good education forour kids. We can live without cable TV, $50per month for security monitoring and a few other things until we arte making the money like we used too. Do you think the gov. could start cuting what they really could live without?

  2. chris neal

    Just another way for weasel politicians to get money, and to dole out favors. Just like tax breaks/credits, pols will offer discounts on the VAT for favored industries or constituents. There is far less potential for graft with a flat tax…

  3. Gary

    The main problem that I forsee is that if a VAT were enacted it would be in addition to the Federal Income Tax. Enough is NEVER enough!

  4. Tom Carroll

    Norm; how can you ask the question is a VAT good or bad? A VAT tax is nothing more then another way to feed the tax and spend idiots that are currently driving the bus in DC. You need to go to Europe to see how destructive taxes can be once they reach the level that kills jobs and the incentive to innovate and improve the countryís standard of living.

    There are two and only two ways to solve the budget deficit in the US. Neither have any thing to do with increasing current taxes or creating new taxes. First and foremost; we must grow our economy and that will not happen if taxes are increased. A growing economy will provide the revenue levels that will balance the budget.

    Second we must cut spending within the federal discretionary budgets across the board including all federal departments including defense. That will require that we get our kids out of Afghanistan and all other countries where we have our troops in harms way. Letís face it; the current commander in chief is more concerned about what his political party thinks then if we win or lose. That does not support keeping our kids where they are being killed every day.

    The federal entitlement programs must be revised without increasing payroll taxes. They must become self sustaining (balanced) by adjusting the benefits. That will require that the retirement age must be raised for everyone under forty-five. Medicare must be revised so that deductibles are being paid by recipients on a need basis formula tied to adjusted gross income with zero deductions. That will keep our older citizens that are poor under the protection of Medicare but will require more well off seniors to pick up a reasonable share of their medical expenses.

    The bottom line should be no new taxes VAT or otherwise and to cut current taxes to the point where we can get our economy growing again.

  5. AnonymousBob

    Gotta love the censorship on this board. I posted a reply soon after Norm posted this and now my comments are gone. “I want the government out of my business, but I’ll gladly regulate what you think/say here.” No hypocrisy, huh?? I could understand if I were dropping f-bombs or calling people names, but I don’t do that because it lowers the level of the conversation. I prefer staying on topic and contributing to the conversation, even if it is counter to the primary post or those others that comment about the post. We all have differing opinions, I understand and respect that. That’s what makes these boards, and life, so interesting. I’ve lost all respect for the moderators of this blog to not allow the posters to self-regulate the conversation. Despite your protestations for freedom from government intervention in your lives, you’ve committed the ultimate example of hypocrisy by using your “delete post” key to censor someone’s opinion. Boo-hiss!!

  6. AnonymousBob

    Crow does not taste good, but we all have to eat it on occasion. My post about the moderators deleting my post is completely in error. I made a bone-headed jump to conclusion and did not notice that Norm posted another blog entry about VAT. My comments regarding his previous VAT post are still there and were not removed.
    My sincerest apologies to the moderators, contributors, and readers of the Trade Only blogs!! Sorry!!!!
    Does anyone have some hot sauce for the crow I have in front of me? :)

  7. AnonymousBob

    I think the standard of living in Europe is very comparable to that we have in the US. Their economies are suffering because they bought the bad investments that originated here in the US.
    Education and innovation are thriving overseas while the US lanquishes far behind in educational performance. We still have extremely innovative companies here but we will see that competitiveness drop if we don’t do something about closing the education gaps between us and other developed countries. Once we do that, I believe we’ll see our manufacturing base grow which will lead to further, stronger, and more sustainable economic growth.
    All of government spending needs to be reviewed and cut. I agree completely about defense spending being out of hand. War is falsely thought of as an economic stimulus for a country but Iraq and Afghanistan have shown war (especially when unpopular and illegal) to be a drag on economic performance. Not to mention the physical and emotional costs! We need to bring our troops home now! And, it is both parties that don’t care about anything other than scoring political points. The Obama group is no different than the Bush/Cheney regime in that way.
    I agree with your statements about the entitlement programs, especially regarding Medicare deductibles being tied to a needs-based formula.
    And, no, we do not need a VAT for anything.

  8. jp

    Are you crazy? We do not need any more taxes in this country. The government needs to balance the budget and live on a budget like the rest of us. A VAT on top of income taxes, corporate taxes, sales taxes, and capital gains taxes will absolutely kill the marine industry and many other business in this country.

    If you want a VAT, then move to Europe.

  9. C. Moore

    Free thinker & ABob are socialist trolls.
    Free thinker can’t aford $50.00 a month, do you think he has a boat payment? Or is in the a marine biz? We all here who are in the boat business know that no one needs a boat, that is why customer service is important.
    The standard of living in Europe is nothing like in the USA. Abob just wants the USA to be like the Euro’s. The general populus of Euro’s don’t own boats they rent them- because they are taxed to death.
    We don’t need VAT we need to eliminate the death taxes that will be coming back next year.

  10. AnonymousBob

    C. Moore:
    Maybe you should review the definition of socialism and then re-read my comments and those of Freethinker and then explain to us your convoluted logic that causes you to spout that Freethinker and I are “socialist trolls”.
    If that hurts you too much, let me summarize:
    Freethinker and I feel that government spending needs to be reduced.
    Freethinker and I feel that a VAT is a bad idea.
    Neither of us said government needs to expand or that we want more government intrusion.
    Do any of those sound like socialist ideals?

    The standard of living in Europe is very comparable to the USA. Granted, they may not have as many boats as we do because of their fuel taxes, but their general standard of living is very comparable to ours.


  11. C. Moore

    Trolls you gotta laugh at them. Socialist /Progressives one in the same. Anti military-oh yea they aren’t anti military just anti war LOL one in the same. I deal with euros every week & the ones I know have repeatedly warn me don’t let your gov’t become likes ours.
    Though I think we just have one with 2 names….LOL
    Lets get back to the Marine business

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