Is An American VAT Tax In The Works?

Many tax experts think a European-style Value Added Tax (VAT) will inevitably find its way to American shores in the near future. Created in 1954 by a French economist, the VAT is by far the most efficient way to raise money for the government from a revenue perspective, according to CNN Money. With record budget deficits, a $10 trillion national debt, and looming Social Security and Medicare crises, a more efficient tax system may be just what the doctor ordered.

What Is A VAT?

A VAT is basically a sales tax, although it’s more complicated than other national sales tax proposals such as the Fair Tax. Where the Fair Tax is a one-time levy at the point of sale, in a Value Added system a tax is levied at each level of production. As an example, miners are taxed for their production, who then sell metal ore to building materials companies. Those building materials companies refine the metal and shape them into basic building materials, such as steel beams etc. The difference in value between the value of the input (raw ore) and output (steel beams) of the building materials companies is the value added by those companies. The value added in then taxed, hence the moniker Value Added Tax. This continues on down the line with the various companies that use the steel to build things such as airplanes, skyscrapers, etc, a tax being collected at every step along the way.

Following are some pros and cons of a European-Style VAT tax being integrated into the American tax code and what it could mean for you.

Advantages Of An American VAT

• Less Tax Evasion - Under the current income-tax system, one only has to find a way to minimize or eliminate income to avoid taxation, which isn’t as difficult as many imagine it to be. In a VAT system, however, to completely avoid taxation would require multiple independent entities all up and down the supply chain from miner to end customer cooperating with each other without any acts of betrayal. This is unlikely to say the least. Less tax evasion means more tax revenue without placing undue burden on honest taxpayers.
• More Government Revenue - Less evasion means higher revenues, but that’s just the beginning. A sales tax like the VAT or Fair Tax broadens the tax base considerably. For instance, under a VAT system foreign tourists would contribute to our federal tax system, raising billions upon billions of dollars our government would otherwise have no way of gaining access to.
• Help Decrease Black Market Operations - A major advantage of the VAT tax over the Fair Tax or Income Tax is that it decreases the profitability of black market operations considerably. Under the Fair Tax proposal, the full tax is paid by consumers at the point of sale. The tax amount is listed right on the receipt and is very visible, making consumers intimately aware of its existence. The VAT tax, on the other hand, is collected all along the supply chain with only a small amount due in cash from the customer at point of sale. It’s much more difficult for large corporations to have large-scale black market dealings without getting caught than for individual consumers. Also because it is collected all along the supply chain, the full amount of the VAT tax is somewhat hidden from consumers, limiting the appeal of dealing with unscrupulous black-market dealers.

Disadvantages Of An American VAT

• It’s Confusing - Because every level of production is taxed, it is very difficult for voters to know exactly how much they are paying without substantial research. At least with an income of fair tax system, consumers can easily add up exactly how much in total tax they paid throughout the year. A VAT system would make that task much more difficult.
• It’s Not Transparent - Related to the above point, lack of transparency has caused problems in many nations using this system. For example, its complicated nature has lead to phantom tax hikes in many European countries where politicians have tried to sneak tax increases by over-taxed voters to fund ever more social programs. A VAT tax would likely have the same effect in America, at least to some extent.