Europe's VAT Lessons-- Rates start low and increase (Perils of a 9-9-9 tax)

WSJ ^ | April 15 2010

[dennisw]

One trait of European VATs is that while their rates often start low, they rarely stay that way. Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate. Denmark has gone to 25% from 9%, Germany to 19% from 10%, and Italy to 20% from 12%. The nonpartisan Tax Foundation recently calculated that to balance the U.S. federal budget with a VAT would require a rate of at least 18%.

VATs were sold in Europe as a way to tax consumption, which in principle does less economic harm than taxing income, savings or investment. This sounds good, but in practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate. The top individual income tax rate remains very high in Europe despite the VAT, with an average on the continent of about 46%.

As Americans rush to complete their annual tax returns today, there is still some consolation in knowing that it could be worse: Like Europeans, we could pay both income taxes and a value-added tax, or VAT. And maybe we soon will. Paul Volcker, Nancy Pelosi, John Podesta and other allies of the Obama Administration have already floated the idea of an American VAT, so we thought you might like to know how it has worked in Europe.

A VAT is essentially a national sales tax that is assessed at each stage of production, with the bill passed along to consumers at the cash register. In Europe the average rate is a little under 20%. In the U.S., a federal VAT would presumably be levied on top of state and local sales taxes that range as high as 10%. Some nations also exempt food, medicine and certain other goods from the tax.

[Angry_White_Man_Syndrome]

There is a huge difference. A value added tax (VAT) is added at each stage of production. A sales tax is only at the final transaction between consumer and retailer.

Manufacturers will not have to pay a 9% tax on the materials they buy to produce a product. Under a VAT they would. Retailers will not have to pay a 9% tax on products they buy to sell to the consumer. Under a VAT they would. Do you consider the sales tax a state has now a VAT? The best thing about the 9-9-9 plan is everything is out in the open and the voter can see the direct impact on the price they pay or their paycheck each week. This will make it politically much harder to raise taxes, because everyone will be affected immediately by any increase in any on the rates.

[Beagle8U]

Please explain how it is different than a VAT? When the 9% Corp stacks everything down the line, then the retail customer pays it all PLUS 9% on the total it is a VAT.

[Beagle8U]

See post 39

[Utmost Certainty]

I was only addressing the 9% sales tax component of the plan, which is not a VAT.

You’re already paying a 35% corporate tax + compliance costs (paying tax attorneys, etc.) under the current tax code. 999 drops the corporate rate to 9% AND jettisons all the taxocracy of the current code. Sorry, but that sounds great to me.

[Utmost Certainty]

Oh, and: http://999calculator.net/

Be sure to click the red button near the bottom labeled “IS THE SALES TAX A VAT?”

[Beagle8U]

“You’re already paying a 35% corporate tax + compliance costs (paying tax attorneys, etc.) under the current tax code. 999 drops the corporate rate to 9% AND jettisons all the taxocracy of the current code. Sorry, but that sounds great to me.”

Damn few companies pay an effective 35% today, and none of them under the current system are paying the tax on their labor costs and non-USA materials. 999 = total fail.

[Beagle8U]

I have to leave for an appointment, but will return later today.

[Jonty30]

Cain has also said that he’d like to eliminate those hidden taxes and put everything upfront.

[ziravan]

If you have to lie and call 9-9-9 a VAT to make your argument, you’re losing.

[Mygirlsmom]

Define corporate income taxes then. Who pays them and what effect do they have on the price of goods and services?

Further, tell me why it is ok to have a system where government hands out favors to some corporations who pay little or no tax while their competitors do not have that luxury and what that does to the price of goods and services.

Finally, defend income tax as the "fairest" method of taxation when many wealthy individuals have little or no "income" at all, and those here illegally are operating in a cash economy where they are not taxed either.

[Mygirlsmom]

and since you have such a great understanding of the VAT, please explain cost of compliance of a VAT vs. final point of sale tax and how that effects the cost of goods and services.

[calex59]

I know that, but he would eliminate the progressive tax and during the second stage, when the fair tax would be implemented, the income tax would be gone for good. At least that is my understanding. He also wants to trash the hidden taxes we pay now. The 53% that pays taxes in this country work for the first four months of the year to pay off their taxes before they can spend any on their selves.

[algernonpj]

Yawn. Inane protectionist policies.

You might want a crash course in this: http://en.wikipedia.org/wiki/Comparative_advantage

Ahh .. good ole Ricard and 'comparative advantage'.

For Ricardo's theory of comparative advantage to work, a country's labor, capital, and technology must not move offshore. Ricardo himself admits this. International immobility is necessary to prevent a business from seeking an absolute advantage by going abroad. His theory only works for such factors as geography and climates. Ricardo assumes that patriotism will check investment abroad even under absolute advantage.

From: The Works and Correspondence of David Ricardo, Vol. 1 Principles of Political Economy and Taxation [1817], Chapter Vii, On Foreign Trade:
"The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries"
...
From Ricardo's discussion of the famous example of Portugal producing wine and England producing wool:
"The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.

It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose.

Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations."

Ricardo's theory of comparative advantage does not apply to today's world. Just look at our current sad economic situation.

[algernonpj]

Yawn. Inane protectionist policies.

You might want a crash course in this: http://en.wikipedia.org/wiki/Comparative_advantage

Now as to tariffs:
In 'An Inquiry into the Nature and Causes of the Wealth of Nations', Adam Smith envisioned a world of small local businesses run by the owner, and the employees of these businesses.

Adam Smith listed the following conditions to impose tariffs:

Book IV, Chapter II, 'OF RESTRAINTS UPON IMPORTATION FROM FOREIGN COUNTRIES OF SUCH GOODS AS CAN BE PRODUCED AT HOME':
"As there are two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, so there are two others in which it may sometimes be a matter of deliberation, in the one, how far it is proper to continue the free importation of certain foreign goods; and, in the other, how far, or in what manner, it may be proper to restore that free importation, after it has been for some time interrupted.

1.When the industry is necessary for national defense. Smith uses the example of the navy and shipping.
"The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping."

2. When domestic production is subject to an internal tax which makes it more difficult to sell domestic products compared to foreign products.
"The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, is when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former".

3. When a nation to whom one exports, imposes a tariff on one’s exports.
"The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods, is when some foreign nation restrains, by high duties or prohibitions, the importation of some of our manufactures into their country. Revenge, in this case, naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours. Nations, accordingly, seldom fail to retaliate in this manner
. . .
The short term increase cost of goods, will be offset by long term advantages. There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods."

3.Smith also argued that when tariffs are repealed, it should be done slowly.
"Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable."

[dennisw]

VAT is a semi-stealth tax concocted by European socialists to silently steal from the populace. The entity who pays the highest VAT tax is the retail buyer so in this way it is like a sales tax which I prefer over VAT. Aside from the retail buyer the European Gov’ts extract smaller VAT taxes up the production chain as value is added to an item. This part of it is the stealth tax. The retail level VAT tax is out in the open

[dennisw]

600-700 billion dollar trade deficits mean nothing to these fools. They stick with a theory of free trade that simply does not work for America at this time and place. They are as faithful to “free trade” as the Russians were to Marxist-Leninism theories

I believed in free trade for a few years .....but that was 25 years ago or so when I was libertarian

[ROCKLOBSTER]

I’ve always been a fan of putting everything up for a national public vote.

Maybe so, but that's not the way it works. We are NOT a democracy.

[dennisw]

Define corporate income taxes then. Who pays them and what effect do they have on the price of goods and services?

Don't believe what Sean Hannity told you. Higher corporate taxes are not always passed onto the consumer to be paid by an allegedly "captive" consumer. During a recession such corporate pricing power is diminished. BTW I like Sean Hannity but he dumb on this topic

[CMAC51]

My 9-9-29 plan

9% business flat tax

9% flat personal income tax

29% tariffs on all imports

Yep tax the foreigners for the right to sell their stuff in the great American marketplace. Prices will rise a bit but this will bring home lots of jobs and factories. This will encourage domestic oil production after the next Republican president nukes the EPA because we import 60% of our oil

There is an added bonus to the sales tax and it's a big one.

The plan will harvest at least $8 to $10 billion per month (potentially more, much more) in revenue that is currently going off shore. It will restore a great deal of competive balance in the import/export arena.

Under our current system, all of the tax liability of the people and companies involved in producing and selling a product are embedded in the cost of the product. For example, when Ford pays the assembly line worker, the pay includes payroll taxes and income taxes paid by the worker. That expense all goes into the price of the car. When a foreign product comes in, it does not have US taxes embedded, however it competes in the marketplace against US products that do have the embedded costs. When the foreign product is sold, the difference heads straight out of the country. With the 9-9-9 plan, at least 9% of the embedded costs are removed and collected at the point of sale instead, resulting in an out the door price roughly equal to the previous price. The foreign product must now compete at the lower cost. The 9% sales tax is added on the end. The little bonus that the foriegn company was collecting is greatly reduced. Since our trade deficit alone is $80 billion per month, we know at least that much will be subjected to 9%. In truth a whole lot more. Sales tax on imported goods will be a tax bonanza without the US taxpayer paying one nickel more.

On the other hand, what does it do for US exports. The 9% sales tax is already removed from the cost of the goods. Also, export revenue is excluded from the 9% business tax. So exported items will have a total cost at least 18% lower than they currently do. Just imagine what that will do for the export of US manufactured goods and food. An export bonanza. The profits from this will go back into the economy and be hit with the 9% sales tax. Everybody makes out, more jobs, more exports increasing profits and 9% sales tax reaped on the expenditure of those profits.

Win-win-win!

[CMAC51]

There is a added bonus to the sales tax and it's a big one.

The plan will harvest at least $8 to $10 billion per month (potentially more, much more) in revenue that is currently going off shore. It will restore a great deal of competive balance in the import/export arena.

Under our current system, all of the tax liability of the people and companies involved in producing and selling a product are embedded in the cost of the product. For example, when Ford pays the assembly line worker, the pay includes payroll taxes and income taxes paid by the worker. That expense all goes into the price of the car. When a foreign product comes in, it does not have US taxes embedded, however it competes in the marketplace against US products that do have the embedded costs. When the foreign product is sold, the difference heads straight out of the country. With the 9-9-9 plan, at least 9% of the embedded costs are removed and collected at the point of sale instead, resulting in an out the door price roughly equal to the previous price. The foreign product must now compete at the lower cost. The 9% sales tax is added on the end. The little bonus that the foriegn company was collecting is greatly reduced. Since our trade deficit alone is $80 billion per month, we know at least that much will be subjected to 9%. In truth a whole lot more. Sales tax on imported goods will be a tax bonanza without the US taxpayer paying one nickel more.

On the other hand, what does it do for US exports. The 9% sales tax is already removed from the cost of the goods. Also, export revenue is excluded from the 9% business tax. So exported items will have a total cost at least 18% lower than they currently do. Just imagine what that will do for the export of US manufactured goods and food. An export bonanza. The profits from this will go back into the economy and be hit with the 9% sales tax. Everybody makes out, more jobs, more exports increasing profits and 9% sales tax reaped on the expenditure of those profits. Win-win-win!