Archive for U.S. VAT?

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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The impact of a VAT introduction

The UAE still plans on introducing a VAT in 2018 – currently the thinking is that the rate will be in the range of 3-5%.

I sometimes get questions about the impact of the greenfield introduction of a VAT – this article has a couple of interesting thoughts: http://gulfnews.com/business/economy/vat-an-inevitable-transition-for-uae-economy-1.1654543

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Cruz offers a VAT, but not as we know it

It seems like VAT pops up a couple of times in every election cycle. This time it is Ted Cruz, one of the Republican presidential hopefuls, who proposes a “Business Flat Tax”.

Cruz says that:

“all companies will pay a simple, low rate Business Flat Tax of 16 percent. The tax will be based on revenues minus expenses such as equipment, computers, and other business investments.”

The Tax Foundation has reviewed the impact of the entire plan (BFT is just an element of a bigger plan) and says of the BFT:

“Enacts a broad-based, 16 percent “Business Transfer Tax” or value-added tax. This tax is levied on all business profits, less capital investment. This would include the payroll of business, government, and non-profit institutions, as well as net imports. The tax would exempt from taxation the purchase of health insurance.

A business transfer tax is also often known as a subtraction-method value-added tax. While its base is identical in economic terms to that of the credit-invoice VAT seen in many OECD countries, it is calculated from corporate accounts, not on individual transactions.”

The Tax Foundation’s entire analysis is here:  http://taxfoundation.org/article/details-and-analysis-senator-ted-cruz-s-tax-plan.

Interesting!

So, like in sales tax, under BFT we don’t have to deal with the burden of mandatory invoicing – no input tax calculation on purchase invoices and not output tax on sales invoices, but rather Accounts Receivable minus Accounts Payable is the gross tax base, from which some adjustments can be made (the capital investments that may not appear on Accounts Payable, depending on the accounting rules).

Also, we don’t have to worry about tax rules of goods vs. services, inter-state zero-rating, reverse charges, imports and exports, because all these sales and purchases would be included in the company’s accounts, and thus included in BFT’s tax base. The trouble is that exports would be standard rated, but surely these supplies can be simply excluded from the tax base.

However, my main critique is that I can’t see any VAT-like indirect tax without invoices. Sure, not every VAT is as invoice-focused as the European type (think the consumption tax in Japan), but in reality even the auditors of Mr. Cruz’ plan would like to see more support for the input tax credit than simply putting a purchase in the AP account. Or ensuring that every sale is booked in AR. There are plenty of excellent examples in Brazil, China, Taiwan and elsewhere, where invoicing is a key driver for taxability, yet the admin burden can be simplified with online clearing.

The somewhat-optional “fiscal voucher” system that Puerto Rico proposes for the April 1, 2016 introduction of VAT will probably have to get more serious if Puerto Rico wants to improve on anti-fraud auditing and reporting.

The New York Times has a recent article on Cruz’ tax plans – not easy on the eyes because of the staccato writing style of the author: http://nyti.ms/1Ow5jDx

Cruz has always been the enfant terrible of the Republican mainstay and it would be hard to imagine conservatives agreeing on a tax plan like this. But hey, Cruz is a key player at this point of the elections (December 2015) and he even has a good chance of becoming the Republican presidential nominee.

Let’s see what happens – I will keep you updated.

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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:

http://taxprof.typepad.com/taxprof_blog/2015/11/wsj-value-added-tax-catches-on-in-republican-presidential-race.html

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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: http://taxfoundation.org/blog/ted-cruz-s-business-flat-tax-primer – 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: http://taxfoundation.org/article/details-and-analysis-senator-ted-cruz-s-tax-plan

Finally, the Senator has the entire plan here: https://www.tedcruz.org/tax_plan/

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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: http://www.law.yale.edu/documents/pdf/News_&_Events/Graetz_Tax_Plan.pdf

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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.

Synopsis:

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.

See http://www.internationaltaxinstitute.org/

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