Archive for U.S. VAT?

VAT in the U.S. – what is a VAT?

The TaxProf Blog reports on an article in the Wall Street Journal that labels some Republican tax plans as a “Value-Added Tax”. Apparently the “business flat tax” or “business activity tax” are considered Value-Added Taxes, which I believe is incorrect. Of course there is no set definition of a VAT or GST, at least not as the rest of the world know it.

The WSJ then continues to state that

“Almost every country in the world uses a VAT, imposing a tax on middle-class consumers and workers to fund benefits such as parental leave and health insurance.”

which I believe is a rather narrow statement as well. In itself, most VAT systems are regressive, which means in this framework that the tax burden is on the lower income brackets rather than the higher, even though this effect may be neutralized by way of other tax or non-tax subsidies.

Have a look at the article here:

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Senator Cruz proposes a tax that is not a VAT

As you all know, this is the time that Republicans float tax proposals, and they come in various degrees of detail and seriousness.

Senator Cruz, who as per today polls at 6.6%, launched a proposal for a “Business Flat Tax”.

Alan Cole from the Tax Foundation has a nice write-up here: – he calls it a “tax-inclusive subtraction-method value-added tax”.

Cole says:

“Ted Cruz has proposed combining the corporate income tax, the payroll tax, and some of the income tax into a single, larger, broader tax assessed on businesses. While the tax would be new in many respects, it would produce revenues from the same general kinds of economic activity taxed by the things it replaces.

It would not be similar to existing sales taxes, or the VATs in Europe, because it would not be levied on a transaction-by-transaction basis. Be skeptical of analysis that assumes this tax would be like a sales tax, or that it wouldn’t apply to nonprofit salaries like mine, and so on.”

The Tax Foundation has an estimate of the tax plan here, which is interesting from an academic and social-economic perspective:

Finally, the Senator has the entire plan here:

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Why no VAT in the U.S.?

Earlier this week I attended a speech by Professor Michael Graetz from Columbia Law School. Mr. Graetz is one of the developers of a framework for a VAT or GST in the U.S.. It comes down to a broad-based GST like in New Zealand, with added support for lower incomes, to combat the regressive effect of a VAT/GST. (Regression here means that the burden of the tax is disproportionately carried by the lower incomes, because the spend (not save or invest) a high percentage of their income.)

One of the questions, of course is why there is no VAT/GST in the U.S., given that every other country has a VAT/GST?

The answer is that VAT/GST or similar consumption taxes became popular after the Second World War in countries that urgently needed money to rebuild their society. The U.S. was rich at the time, both in absolute terms as relative to other countries’ economies. So the U.S. missed the boat on implementing a consumption tax, which later on became politically unacceptable.

The reason why there is no VAT now is only politically driven. Politicians are concerned that introducing a federal consumption tax would be extremely unpopular – even when included in a major overhaul of both personal and corporate income taxes. From Graetz’ proposal, however, it is clear that the introduction of a VAT/GST would not have a major economical impact on consumers.

As Graetz put it, the Democrats have to understand that VAT/GST is not regressive, and the Republicans have to understand that VAT/GST is not a major money maker to fund a big government.

Slides similar to those presented are here:

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“VAT, the only answer that is a real answer”

Join me at this seminar featuring Professor Michael Graetz (Columbia Law School). He will speak in the Grand Hyatt in NYC on Wednesday, June 17, 2015.


Representatives of large U.S. MNCs are pressing Congress to lower the corporate tax and exempt dividends received from foreign subsidiaries. Tech firms want to add a special low tax rate on innovation income to the list. Representatives of small businesses, notably the politically powerful NFIB, object to funding these changes by base broadening unless individual income tax rates—applicable to partnerships, LLCs, and subchapter S corporations—are also reduced significantly.

Democrats in Congress insist that these measures cannot be funded by cutting spending on health insurance, social security, food stamps, or assistance to needy families.

So while the direction of income tax reform is clear, paying for it currently seems impossible. There is, however, one clear path, one taken by more than 160 other countries around the world: enact a national tax on sales of goods and services. In fact, this may be the only way to overcome the current stalemate.


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GST in India – slowly getting there

The introduction of GST (Goods and Services Tax = similar to VAT) in India has been a long time coming. Over the past couple of months the discussions and negotiations have made good progress, and it seems that finally the GST will be introduced at some point next year.

India is developing their own knowledge of dealing with a federal GST – most states in India currently already have some form of GST or VAT, but a federal VAT is a new beast.

I enjoyed reading this criticism of a federal GST in The Hindu, called “GST: Good for business, snag for federalism?”. In this well-researched opinion piece the author discusses both the social and economical impact of a federal GST.

This article is also worth your while if you are (still) interested in the effects that a potential federal VAT in the U.S. may have.

Have a look here:

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Puerto Rico: Let’s keep that sales tax a bit longer…

My friends from EY did a nice write-up on the recent non-changes in Puerto Rico, with a grossly misleading title: “Puerto Rico becomes first US jurisdiction to adopt VAT system”.

Not so fast! For now, the agreement is to increase the sales tax rate, and – with lots of luck – a VAT somewhere in the second or third quarter of next year.

I know that a number of you have been on the fence about what to do with the PR tax proposals. EY’s overview is worth your time.–Puerto-Rico-becomes-first-US-jurisdiction-to-adopt-VAT-system

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A hybrid SUT / VAT for Puerto Rico?

I know that more than a few clients of mine are trying not to lose track of the developments in Puerto Rico. The various proposals for indirect taxes that have been doing the rounds recently are all very interesting, but the key for businesses is how all this can be timely implemented in the ERP / accounting system.

Grant Thornton produced a brief less-than-one-page overview – this is the current position and there is nothing more to say at this time…

Download (PDF, 149KB)

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