Taxes

VAT Thing You (Don't) Do

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As worries about the growing federal deficit have risen in Washington, so has chatter about the possibility of implementing a VAT, or value added tax. Sen. Kent Conrad and Speaker Nancy Pelosi have both indicated interest, and Congressional Budget Office chief Doug Elmendorf noted earlier this month that his agency had received "a lot of questions" about the tax, which would levy fees on value added at each stage of production.

But it now looks like the Senate has put the kibosh on this idea, at least for the moment:

Another kind of vat.

The Senate went on record Thursday as overwhelmingly opposed to a value-added tax—something much talked about by Democrats and those close to President Obama of late—approving by 85-to-13 a resolution declaring the penalty a "massive tax increase that will cripple families on fixed income."

Twelve Democrats and one Republican, Sen. George Voinovich of Ohio, voted against the resolution, which was sponsored by Sen. John McCain, Arizona Republican.

At this point, without any legislation on the table, it's easy to think of the VAT as a streamlined revenue-raiser, simple and straightforward and highly effective at raising revenue. But I think Elmendorf is right to caution that, in reality, any policy that actually passed probably wouldn't be so simple.

"If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to." [Elmendorf] said. "The VAT tax itself could become very complicated."

My caution to VAT supporters, then, is not to think about it in its pure, white-paper form, but to think about how it might actually look after everyone in Congress—and all their associated interest group allies—got their hands on it.

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  1. Let the Carnival of Rent-Seeking commence!

  2. “The VAT tax itself could become very complicated.”

    Oh, piffle!

    We’ll put our top men on it.

    1. Top. Men.

  3. My caution to VAT supporters, then, is not to think about it in its pure, white-paper form, but to think about how it might actually look after everyone in Congress?and all their associated interest group allies?got their hands on it.

    That is the best argument against the VAT-like “fair tax”.

    1. Not sure about that. Overly complicated income tax vs Overly complicated consumption tax.

      Yeah, the Fair Tax still wins.

      1. And Im sure they could overly complicate the single tax, but I still favor it (well, as my #2 choice behind “none”).

  4. massive tax increase that will cripple families on fixed income.

    They’re just putting a marker down for another crypto-welfare entitlement program – a “refund” of VAT taxes to low-income families.

    it would be subject to many of the same (tax) preferences the income tax is subject to.” [Elmendorf] said. “The VAT tax itself could become very complicated.

    If Congress didn’t think complexity and preferences were a big plus, they wouldn’t put them in the tax code, and wouldn’t have passed health care reform.

    File this report under “red herrings”. Note that the necessary one (1) Republican is on record as favoring a VAT.

  5. I’m all for VATs as long as their filled with congresscritters and sharks with frickin’ laser beams on their heads.

    1. D’oh. Replace the first ‘their’ with ‘they’re’ at your convenience.

  6. It’s pretty simple really. Over the past decade or so, due to “compassionate conservatism,” more and more people have been left off of the income tax rolls. I said all along, as this was being done, that it would turn out to be a mistake, because now we have some 43% of earners not having skin in the game — and therefore not caring that income tax rates are headed up, since it doesn’t affect them.

    So now you’ve got statists wondering how they can soak the entire spectrum, from rich to poor, and get everyone to “give back to the community.” So they propose a VAT.

    This news that the Senate has — for now — rejected the idea is probably the best news I’ve heard all week.

    Fight the VAT with every fiber of your being, comrades.

  7. Years ago I had a very small business in Europe. The computation is indeed complicated. I had to pay an account for a full day or two to do it. And for a large business, it’s obviously exponentially more difficult.

    Of course, for consumers it’s simple. And expensive.

    1. Would have thought it would be very simple to account for. All incoming bills you code the VAT amount to a “VAT paid account.” All outgoing invoices, you code the VAT to a “VAT collected” account. What you owe the government is the difference in the two accounts.

      1. The VAT rate varies for different types of goods however. So it isnt that simple.

  8. My caution to VAT supporters, then, is not to think about it in its pure, white-paper form, but to think about how it might actually look after everyone in Congress?and all their associated interest group allies?got their hands on it.

    Very true, and the best argument against it. Though I’m not convinced that it’s all that much worse than what happens with the income tax and, even worse, regulation, which looks “free” to politicians even if there’s more social engineering going on.

    VAT social engineering is at least obvious; I think that regulation ends up being even worse because it’s mor elikely to have hidden costs. Certainly nothing says that a VAT would reduce concomitant regulation, though.

  9. My caution to VAT supporters…

    Normally I’d say something like, “Maybe you should pretend that what VAT supporters want is a vast rent exchange hidden from voters, any explanation of which sounds like a LaRouchean conspiracy and will be dismissed as such by all Right Thinking People, and that’s why they argue for it in an idealized ‘white-paper form’ that they know can’t exist. And they know this because they aren’t actual retards. They’re evil fucks.”

    But I guess you actually associate with some of those people, and you know they’re retarded, or you wouldn’t “caution” them like they’re an baby with its hand over a burner.

    You’re a good man, Suderman, palling around with mongs like it’s no thing. And I salute you.

  10. Just an FYI: Americans who buy a lot of stuff in the UK (and the EU, too, I believe), can recoup the money they spent on VAT taxes.

    Naturally, there are a few forms to fill out…

    1. Yea, visitors to Canada can do the same thing with the Goods and Services Tax which is more like a national sales tax than a VAT. I believe they can do it with provincial sales taxes as well.

      The paperwork and documentation always struck me as too much of a pain in the ass.

      Mind you, they wouldn’t if I actually spent any money there instead of mooching off friends.

      1. Correction, visitors to Canada could do the same thing with the Goods and Services Tax until 2007. This according to the infallible Wikipedia. 🙂

      2. Isaac – I probably s/h checked, too. Fortunately, they haven’t changed the VAT refund.

        I really, really, should have done this in 2002 when I went to the UK for 6 weeks. In addition to all the crapI bought there, a friend asked me to buy some cricket batting pads for her husband, and a bat for her son – probably $300 total, about $30 of which was VAT. Adding in my stuff, I left ~$100 on the table.

        Oh well, I’m sure it was wisely spent by the NHS.

  11. The best argument against the VAT is that it will simply be another tax on top of the complicated income tax we already have.

    The problem is not that the governmetn does not collect enough tax revenue – the problem is that it spends too much money.

    Particularly on open ended entitlement programs – a problem that the Obama administration has greatly exacerbated with the Health Care entitlement and the enactment of new education entitlements.

    1. The VAT (with refunds up to the poverty level) is essentially Milton Friedmans proposal for fair taxation. The ONLY reason in my mind that this is a bad idea is that the VAT will not replace income tax, but supplement it. Our tax rates will effectively double

      1. Actually, Friedman proposed a negative INCOME tax, not a VAT with refunds.

        The FAIR tax is a consumption tax with refunds. It isnt a VAT either, in that it is added on at the end, so isnt hidden and isnt done at each level of value.

        1. robc – you are correct, Milton Friedman’s negetive income tax is very different – my mistake, I haven’t looked at that stuff in a while. But I think there are some significant similarities between fair tax and VAT. the fact that it is hidden is economically unimportant. The fact that it takes place at every level of value is not that important either – it just spreads out the taxation through the manufacturing process instead of assessing it completely at the end.

          1. True, the VAT and Fair tax have similarities. VAT might actually be better, I dont think it applies to services. 🙂

            I wouldnt favor either without a constitutional amendment overturning the 16th. We dont need both.

            The Fair Tax, because is is done openly, is slightly less likely to become overcomplicated with different rates for every type of product.

            Plus, saying the VAT and Fair tax are equivalent is like saying that withholding and writing a check each month for your income tax is equivalent. They may be economically, but they arent politically.

            1. FWIW, VAT doesn’t have to be hidden, although european countries that have it generally do hide it.

      2. There is no such thing as a “fair” income or consumption tax because neither an individual’s income or consumption has any correlation to the dollar value of government services actually received personally and directly by that particular individual.

        The only fair way to finance governmetn activities would be on a user fee basis – like the gas tax on drivers for using the roads.

        Of course such a concept would rule out the existence of “entitlement” programs.

        And that would be a feature – not a bug.

        1. FAIR is the name of a tax proposal, not a comment on its fairness.

          1. What a coincidence that they wound up with that acronym!

        2. Yeah it all comes down to how people view government. Is it there to provide essential services–paid for by individuals proportionate to their use of those services–that can’t be provided by anyone else? Or is it there to transfer property from one individual to another, by force if need be? A person’s answer to that question tells you a lot.

      3. I agree with this.

        I personally believe that a consumption tax of some kind – VAT, national sales tax, Fair Tax, whatever – is preferable to income tax (or even property taxes, which are just as evil as income taxes), but unless and until the 16th Amendment gets repealed and there is no longer an income tax, no way no how I support any of it.

        FWIW – this is the argument that a lot of disingenuous hypocrite types have put out against the Fair Tax, “My opponent favors a national sales tax… ON TOP OF INCOME TAXES! while conveniently neglecting to mention income tax repeal as a key part of the Fair Tax proposal itself, yet now, these same incumbents are proposing the very same thing: a sales tax on top of income taxes.

        No one who calls him self a legitimate supporter of the Fair Tax would actually agree to it without the repeal of the income tax first.

        1. Not just a repeal of the income tax. Repeal of the Income Tax Amendment. That is my problem with some Fair Tax proponents, they think repealing the tax in law will get rid of it. It wont.

          1. Agreed. Should have been more clear.

  12. Anti-VAT Constitutional Amendment. Pronto.

    1. [snicker]

  13. I predict that, when push comes to shove, Republicans and “fiscally responsible Democrats” will have to choose between a VAT and entitlement cuts.

    They will choose the VAT, to “balance the budget.” Because they are less afraid of the backlash from putting in a new tax than they are the backlash from cutting entitlements.

    They will have to beaten, repeatedly, until they are more afraid of putting in a new tax. Unless we roll over and accept our fate as mules for the redistributionist state, I’m thinking we are looking at social conflict on the scale of the civil rights era and Viet Nam.

    The social and political bloodletting that has become necessary to stave off fiscal disaster is truly, truly daunting.

    1. just inflate that debt away while manipulating the CPI…

    2. The social and political bloodlettingsucking that has become necessary to stave off fiscal disaster is truly, truly daunting.

      Fixed.

  14. VAT tax punishes people for creating goods and people that buy goods. its a piss poor idea for generating revenue. there are so many other ways, including ones that do not involve force.

  15. social conflict on the scale of the civil rights era and Viet Nam.

    Speaking of which, where is the video of streets running red with blood from “violent racist teabagger insurrection day”?

    1. Same place they keep the video of the same thing occurring after concealed carry laws are passed.

      1. In the vault, right next to the video of streets running red with blood because of recently legalized assault weapons.

  16. Economics truisms: People respond to incentives. If you tax something, you’ll get less of it.

    Therefore, if you really tax “value added” then you’ll get less added value throughout the product chain. If you tax income, you’ll get less income producing activity. The exact opposite of a “sin tax” where you pay a tax because you do something bad, both the VAT and the income tax levy a tax on something that is inherently good: earning income (which means producing value, in a free market), and “adding value” through the manufacturing and distribution chain.

    Gilbert Martin is right – user fees are the only way to go.

    1. So the income tax has obviously incentivized everyone to stop earning income. that is what you conclude?

      1. Do you understand the difference between “less” and “none”? Or doesn’t that translate well into Styx-Japanese?

        And yes, when income tax rates rise, people trade leisure for work, since work pays less.

        Moron.

        1. I actually had this anecdotally confirmed by a Norwegian coworker. He explained to me that since overtime in Norway was taxed so much, he didn’t work any overtime. He would rather spend time with his family. This was, of course, in the context of complaining about how we were working too hard to finish a project on time for his customer.

  17. Be warned, the VAT is, according to Canadians I know, the “Mother of all Taxes.” They’ll sell it in at 3-5% and, because well fail as a country without increasing it, in 2-5 years it will be hovering around 15-20% resulting in all goods costing 30-50% higher than now. Don’t believe me, just check out Canadian and European prices. Nuf said.

  18. But it now looks like the Senate has put the kibosh on this idea, at least for the moment.

    Wow, I feel so much better now because the Senate is so honest and trustworthy!! Nooooooot. Let’s see what happens AFTER the November election.

  19. My caution to VAT supporters, then, is not to think about it in its pure, white-paper form, but to think about how it might actually look after everyone in Congress?and all their associated interest group allies?got their hands on it.

    Nice sentiments… good advice and all, Suderman, but you could apply that same caution to 80% of every law Congress passes.

    Unfortunately, to many in Congress, the ability to tweak and apply favors is a feature, not a bug.

  20. I support the FairTax!
    Please join me.
    Go to fairtaxpostcards.org and get your cards today!
    Together we can make change happen.
    FairTax Now!

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