Archive for U.S. VAT?

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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Puerto Rico tax now 11.5% – but still a VAT?

As I mentioned earlier, developments are following fast in the VAT world of Puerto Rico. This week’s proposal is for 11.5% tax on sales and 10.5% tax on imports.

“Essentially, the plan would increase the existing 7% sales & use tax (IVU by its Spanish acronym) to 10%, while adding 1.5% for municipalities. Meanwhile, the tax collected at the ports, currently at 6% and charged through PICO (Spanish acronym for Integrated Merchant Portal), will increase to 10%, plus a 0.5% for municipalities, according to Treasury Secretary Juan Zaragoza.

The hike to 11.5% would to be completed in “30 days to 45 days” after legislative approval, which the governor said he expects “within the next few days.””

Now, are we still talking about a credit-invoice based VAT, or is this proposal simply an increase of the existing sales tax and port tax rates?

See for more here:

and if you read Spanish:

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Little hope for Puerto Rico VAT

Without much support from the legislature, the Puerto Rico governor is fighting for the life of a new Value Added Tax.

Developments are going fast: first a 16% VAT was rejected by parliament, then a new proposal a 14% VAT looked feasible but could not get the required votes. More is in the link below, but this news may be outdated by the time you read it!

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