There is increasing evidence that a VAT (Value Added Tax) tax could be in our future.
A VAT tax is one that is added and each step of the production and distribution of a product. It is calculated by estimating the market value added at each stage of its manufacture or distribution. Although much of this tax is hidden from the consumer's view (there goes transparency once again....), it is of course ultimately passed on to the consumer in higher prices.
This is not the same as a simple and very transparent sales tax, which is my tax of choice. VAT is not just added at final point of sale, it accumulates along the way.
What does this mean for small business? Much more complicated tax compliance. If you want to see how complicated it can get, look here at how the VAT works in the UK.
James Pethokoukis of Reuters wrote yesterday that there is growing enthusiasm for a VAT tax in Washington:
So in addition to the 70,000 pages (and growing) of income tax code to follow, entrepreneurs will now be burdened with another complex system of taxes to report on and pay. The worst part is that tax compliance is already much more of a cost burden for smaller businesses -- this will only compound that cost.
A VAT tax is one that is added and each step of the production and distribution of a product. It is calculated by estimating the market value added at each stage of its manufacture or distribution. Although much of this tax is hidden from the consumer's view (there goes transparency once again....), it is of course ultimately passed on to the consumer in higher prices.
This is not the same as a simple and very transparent sales tax, which is my tax of choice. VAT is not just added at final point of sale, it accumulates along the way.
What does this mean for small business? Much more complicated tax compliance. If you want to see how complicated it can get, look here at how the VAT works in the UK.
James Pethokoukis of Reuters wrote yesterday that there is growing enthusiasm for a VAT tax in Washington:
Liberals love the idea of a VAT because it's, well, so European -- also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.This is not being floated as an alternative to income taxes, which will soon be soaring much higher at the state and national level, but in addition to this system.
So in addition to the 70,000 pages (and growing) of income tax code to follow, entrepreneurs will now be burdened with another complex system of taxes to report on and pay. The worst part is that tax compliance is already much more of a cost burden for smaller businesses -- this will only compound that cost.
As I am from the UK and have lived with VAT for my entire life, I feel I can make an informed comment on each tax system. The VAT rate was 17.5% in the UK for almost my entire life, and we never complained. I suppose you get used to it. With the economic collapse in the past 24 months the VAT rate dropped to 15%, and most people did not see or notice any difference.
As sales tax differs from state to state here, people notice the difference in price more so than in the across-the-board rate of the UK. It would be a huge change for the American consumer, and business owner, as a VAT level similar to the UK would raise prices considerably. Speaking from a consumers point of view it would be nice to not get all that change back (from pay $1.09, as opposed to 99 cents) but would hate the price hike. From the business owner perspective, it takes away any advantage of placing you business in a certain state, for lower taxes. It would make things much more simple, but less cost effective. The introduction of a VAT is a radical move from a very young administration, but one I feel is needed to raise government capital and make the recovery process as effective as possible.
The idea of VAT on top of existing sales taxes is absurd. Tax compliance is a big issue for small business, but if it is necessary, and allows the small business community to flourish again so be it. Which would you rather? Simpler taxes, but a halt in entrepreneurial ventures or more complicated taxes and the ability and freedom to start a business. My vote goes to more complicated taxes every time.
Since the United States is a Republic in the true sense, HR25, The Fair Tax is by far a superior revenue neutral form of taxation that is more in line with the principals of the Bill of Rights. Our country is founded by refugees seeking asylum from European taxation, lack of religious freedom and various other ideals that are not possible in draconian form of government. The VAT is an added barrier to innovation and a penalty to success. If you want less of something, tax it.