A VAT tax is one that is added at 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 has been keeping us posted as to the progress of this new tax at his blog. In his latest post on VAT, he describes a scenario (not the one being talked about currently in Washington that places this on top of the current income tax system) in which a VAT might make sense and be supported by the public:
Although I might buy into this scenario, I doubt the government-happy politicians in Washington would support his plan."First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)
"Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can't be an add on.
"Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.
"Fourth, the intended tax burden should be kept level at first. A pro-growth VAT -- one that does away with corporate and investment taxes -- might produce more revenue merely by expanding the economic pie."
„a simple and very transparent sales tax“. That would be clean and honest. By the way:
Aren't many types of taxes ultimately a 'sales tax' - in disguise? The bricklayer doesn't pay his payroll tax, nor does his boss. They have to pass it on: Who has to pay? It's always the customer. Who else would?
But calling a spade a spade by making clear how much the Government earns when we as customers pass by at the cashpoint might make people pretty unhappy with their decisionmakers.
Perhaps this is exactly what has to happen on a large scale: making clear, who ultimately pays for every income tax, every payroll tax, every tariff on a commodity etc.etc.etc.: it's Daddy for his kids, Aunty, Granny. It's the customer: the few rich and many not so rich ones.
I have long thought that a reasonable sales tax--a tax on consumption rather than a tax on income--would be a much fairer and cleaner way of gathering money to pay for public services. Just think, instead of individuals and corporations filling out long tax forms, everybody pays at the register. I dislike the VAT concept because it would drive more manufacturing offshore to reduce consumer costs, and would be much harder to administrate.
That being said, I am still outraged. I am a few years from retirement and have been diligently investing in Roth IRAs to realize tax free income in my golden years. Now the government will find a way to tax me and my responsible cohorts anyway. Scammed again. It is likely that I will be spending my retirement in another country.
"VAT tax"? Kind of like "LAN Network" or "ATM Machine". Just what exactly did you think the "T" in "VAT" stood for? Sheesh...
The current politicians in congress would prefer the VAT to a national sale tax because it is hidden. Also they would have it as an additional tax not a replacement. They will not support reform of what and how much they spend of the federal budget. I have noticed that the politicians can and have the federal budget to BUY votes of person who received federal and/or state aid.