Archive for U.S. VAT?

Yet another “VAT in the U.S.” attempt

Another proposal for U.S. tax reform has been launched – this time it comes down to abolition of corporate income tax, simplification of personal income tax and a VAT (a “credit-invoice based consumption tax”) at a rate of 7% to somewhat make up for the revenue loss.

The Tax Foundation provided a detailed analysis of the plan and concludes:

“Rep. Jim Renacci’s tax plan would reform the individual income tax and replace the corporate income tax with a credit-invoice value-added tax. If enacted, his plan would reduce federal revenues by $845 billion over the next decade. The Renacci plan would significantly reduce marginal tax rates on capital and labor income, which would result in a substantial increase of the size of the U.S. economy in the long run. This would increase the revenue that the tax plan would ultimately collect, making the plan slightly revenue positive. Rep. Renacci’s plan would increase after-tax incomes for taxpayers at all income levels.”

See more here:

http://taxfoundation.org/article/details-and-analysis-rep-jim-renacci-s-tax-reform-proposal

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Wrapping up the Puerto Rico VAT debacle

I have seen many botched implementations of VAT, or clueless last-minute VAT rate changes, but the non-VAT implementation in Puerto Rico underperforms the lowest of expectations.

Companies, particularly retailers, have spent ten of millions of dollars on IT and consultants support over the past 12-18 months to prepare their ERP systems and tax determination processes. Only to see Puerto Rico negate their plans to implement a VAT at the very last minute.

Gosh, the last clarification provided by the PR Treasury – without any indication that VAT may not happen – dates from May 25 – 6 days before the non-event.

Anyway, below is a final update. Nothing new in here, other than implementation of the SURI tax filing system has not been cancelled. Yet.

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No VAT for Puerto Rico any time soon

The Puerto Rico Senate has overridden the veto of the Governor – there will be no introduction of VAT in Puerto Rico on June 1. The current Sales and Use Tax as well as the Business Tax will continue after June 1.

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VAT unlikely in Puerto Rico – now what?

Puerto Rico is on the brink of NOT introducing a VAT on June 1. The PR parliament has overwhelmingly voted in favor of a proposal to abolish the plans to introduce a VAT, and to stick to the existing Sales and Use Tax system.

However, the governor may veto this proposal.

Our friend Carlos Serrano (cserrano@reichardescalera.com) writes:

“At this time, certainty on the tax consequences of commercial transactions for June 1, 2016 and thereafter is unattainable. The bill, as approved, will hopefully make its way quickly to La Fortaleza to either become law or be vetoed and in the eventuality of the latter, the outcome will continue to be uncertain until a potentially unprecedented vote at both the House and Senate. If anything can be assured, it is that there will not be a dull moment in the long running saga of Puerto Rico’s attempt at a comprehensive tax reform.”

See Carlos’ entire message here:

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Things people say about a VAT in the U.S.

I thought that this was an interesting set of comments. Some writers are clearly well-educated about how a VAT works and its impact on the economy.

Enjoy at: http://blogs.wsj.com/briefly/2016/03/03/time-for-a-value-added-tax-in-the-u-s-readers-have-their-say-at-a-glance/

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A VAT, Ted, but not as we know it.

Unprecedented, amazing times here in the U.S., where the election circus gets crazier by the day. One of the Republican presidential candidates, Ted Cruz, who currently runs as a solid second, has proposed to replace most taxes with a “Flat Business Tax”. And due to Mr. Cruz’ increased profile, the Flat Business Tax gets a fair share of media coverage.

I looked forward to hearing from the Tax Policy Center, which is a think-tank of tax experts and not immediately connected to any of the political parties. Len Burman is one of their experts, and Len wrote a brief article about the Flat Business Tax and calls it a subtraction method VAT. It’s a quick read – have a look at it here: http://taxvox.taxpolicycenter.org/2016/01/15/ted-cruzs-business-flat-tax-is-a-vat/. He writes:

“Cruz’s VAT is different from the European version in the way it’s administered and in scope.

Most countries use a credit-invoice VAT where firms are responsible for tax on the entire sale price, but claim a credit for taxes already paid by their suppliers. If all their suppliers remit the VAT, then the credits completely offset the tax owed on purchased inputs. And the ultimate tax liability is the same as under the subtraction-method. The credit method is considered an improvement since it is self-enforcing: Purchasers will demand tax invoices from their suppliers so they can claim the credits.”

With this explanation, my point is still that Cruz’ Flat Business Tax is not a VAT as we know it – see my earlier comments here: http://www.us-vat.com/blog/?p=1141 and here http://www.us-vat.com/blog/?p=1127. Some form of the subtraction-method VAT has only been tested in France for a couple of years – I think from 1948 to 1954 – to be ditched swiftly in favor to the VAT that by now the rest of the world has embraced. And the current consumption tax in Japan looks somewhat like a subtraction-method VAT, but only from a distance.

What seems to be underestimated is the economic angle: a subtraction-method VAT is not at all a tax on individuals – subtraction method VAT is a tax on businesses, like Cruz correctly points out. It is just another calculation method to tax business profit.

And credit invoice VAT is not at all a tax on businesses (because only businesses can credit) – it is ultimately a tax on the end purchaser, the individual who does not have a right to credit the invoiced tax.

Therefore, subtraction-method VAT and credit-invoice VAT are profoundly different taxes, with significant differences throughout the supply chain and in the final tax burden.

Interestingly, the U.S. General Accounting Office produced a report in 1989 that discussed various forms of VAT – I linked the pdf below. They basically say that subtraction-VAT is simpler, but credit-invoice VAT is more flexible.

Still, it’s very unlikely that the U.S. will introduce any federal indirect tax under the next few presidents – whether we call it a VAT or not. In the meantime, look out for more critiques on the Cruz tax plans, like here: https://tinyurl.com/z5ddkb5

The most recent analysis of Ted Cruz’ entire tax plan is here:

Download (PDF, 7KB)

The 1989 report of the U.S. General Accounting Office:

Download (PDF, 3.79MB)

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Trying to understand a VAT in the U.S.

Over the past couple of weeks we have seen an uptick in chatter about a VAT in the U.S.

First, one of the Republican presidential hopefuls, Ted Cruz, floated an indirect tax on businesses. He called it a Flat Business Tax.

Then, Cruz’ nemesis Marco Rubio blasted Cruz during a televised debate for trying to introduce a VAT. Both Cruz and Rubio have no idea what a VAT is, and in particular they don’t understand why 99% of the other countries are actually quite happy with their VAT or VAT-like indirect tax.

The Cruz-Rubio exchange magically relieved some columnists from their writers’ block. Here are a couple examples for your reading enjoyment:

“VAT appears in places such as Europe and Canada, and it is a useful tool in funding social welfare programs. Governments of those countries routinely impose a tax on the amount an employer pays to workers, which is one of the reasons why Rubio links Cruz’s ideas with a European-style VAT. ” (http://www.economywatch.com/features/The-Ted-Cruz-Tax-Plan-Realistic-Feat-or-Campaign-Hot-Air0118.html)

That is a payroll tax, not a VAT.

“Our current tax system should be simplified, and should not be vilified as an oddity because we’re the world’s only major non-VAT economy. Being different is not a bad thing. It’s kept the lid on our spending for years, and accounts for much of our dynamism and competitive advantage.” (http://fortune.com/2016/01/18/ted-cruzs-tax-plan-vat/)

Hmm… Really? Not having a VAT but rather a heavy burden of income taxes “accounts for much of our dynamism and competitive advantage”? Sounds a bit short-sighted to me.

“[…] the VAT tax is embedded in both the prices that business that are charging and in the wages they pay their employees.” (https://www.washingtonpost.com/blogs/right-turn/wp/2016/01/15/can-we-kill-the-idea-of-a-value-added-tax-now/)

VAT does not have to be embedded – it is perfectly acceptable for retailers to make VAT visible on cash receipts. And broadly speaking VAT is not a cost in business-to-business transactions. And still I don’t get that idea of VAT being embedded in wages paid to employees, as a payroll tax. That is not the VAT as we know it.

“In Britain, hot food is exempt from tax, so some stores have microwaves to heat the food, which then exempts it from VAT.” (http://www.economics21.org/commentary/value-added-tax-plan-vat-bad-cruz-paul-01-14-2016)

Oh those snarky Brits!

VATinfo.org featured a nice slide:

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