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  • Corrected VAT Lessons From Canada

    Marty Sullivan, a frequent commentator on tax policy, has now apparently decided the United States needs a value-added tax (VAT). To advance the cause, he penned a brief column on “VAT Lessons from Canada” [“VAT Lessons From Canada”, Martin A. Sullivan, Tax Notes, May 3, 2010.] However, in trying to portray the Canadian VAT in the best possible light, Sullivan airbrushed a couple of the more relevant facts.

    The most important fact for the United States and one stunning by its absence in Sullivan’s piece is that the only reason for a VAT debate today is that federal spending has surged dramatically and is not projected to come down materially in the coming years under President Obama’s policies. The long-run federal budget was already on an unsustainable course due to entitlement spending, and now Obama has managed to put the budget on an unsustainable course even in the short term. The responsible and correct action to take is to bring spending back toward historical levels. The alternative is a massive tax hike. Enter the VAT, escorted by Sullivan & Co.

    As Sullivan notes, the federal rate on the Canadian VAT, known as the General Sales Tax (GST), stands at 5 percent while the provincial rates are between 7 and 8 percent. The GST replaced a “clunky old 13.5 percent tax imposed on sales by manufacturers”. The GST is surely a better system than the tax system it replaced. But notice what occurred in Canada — a modern, efficient sales tax replaced a “clunky” old sales tax. Canada did not add a tax. The driving motivation of VAT proponents in the United States is not tax reform, it’s tax addition.

    Thus, with one sales tax replacing another it is not too surprising Canadian tax levels remained fairly steady over the years. Even so, the VAT remains a money machine, which is its primary lure for proponents. The Canadians have a combined federal-provincial rate of up to a hefty 13 percent. This approaches what many regard as the maximum operational rate of about 20 or 22 percent. If the VAT is such a money machine, how is it the Canadian government is prevented from raising the rate? Why are they leaving so much tax money on the table?

    Sullivan nails this one. Unlike most VATs imposed around the world, Canadians suffered a bout of good governance and made their GST transparent. The tax paid on every purchase and the before-tax price is stated separately on receipts and invoices. Unless they keep their receipts and tally the tax every year, taxpayers still don’t know the total GST they paid every year, but printing the tax on receipts at least is a daily reminder of the government take. This has made the GST very unpopular, and politicians arguing for its reduction very popular.

    Another point Sullivan gets almost exactly right is this one. “Make no mistake: A VAT would be immensely unpopular with almost every segment of the public.” The only groups that would like the VAT are Washington’s big spenders, like Obama and friends, and those on whom the benefits of all this spending rains like money from the sky.

    Posted in Economics [slideshow_deploy]

    9 Responses to Corrected VAT Lessons From Canada

    1. Steve Abramson, Sout says:

      There are competitive economic reasons to prefer the VAT to income taxes, and the VAT would probably be introduced along with cuts to personal and/or corporate income taxes. But, as Warren Buttett says, the U.S. is spending in excess of 10% annually above federal revenues and that is not sustainable. Perhaps some cuts will be made to Medicare benefits, but additional revenues will also be needed.

    2. Brian Dooley, CPA. M says:

      I got a comment on my post on the real cost of the VAT saying I had no idea what I was talking about. One person told me that every country should have VAT (in addition to its income tax). Hum… Not only does the VAT increase the direct cost of a product (like a sales tax), it increases the indirect costs.

      The proof is in the pudding Not so, I am told. Well, I looked up the price of my car in the USA and the UK. I have an M-class Mercedes. Cost in USA $45,700. Cost in UK (in dollars) $63,000.

      The UK value added tax is 17.5 (approximately). So, if I added 17% to the USA cost, the UK should only be $54,000 and not $63,000. So, why does it cost 34% more in the UK?

      Ah,… the indirect cost. You see each indirect business pays VAT. For example, the truck that delivers the parts to the UK supplier, had to pay VAT when the truck was purchase. Thus, he has to charge more. Buy the way, even thing he buys cost 17% more; so he has to charge 17% plus enough to cover his income tax on the additional 17% (& at a 40% rate the becomes 30%).

      In a capitalistic society, each business must make a profit on its capital costs. So, even the VAT is marked up. Just imagine a business buying inventory (and paying 17% UK VAT) then having no sales due to the Great Recession.

      Since the UK and the EU (and Canada) has started the VAT only America has had innovations in business. Amazon, Microsoft, Apple and even Virgin Air's SpaceShipOne are all in America. Why, because paying 17% to 25% to open your business doors, keep the doors close.

      Next, the VAT is regressive. The Poor more VAT in proportion to their income.

      Of course Canada, UK and the EU wants us to have a VAT so that we can be as messed up as they are.

      • G B Ahu says:

        I can only add to your points. You are right when you have sales tax you know what kind of tax system you have better than when you have VAT introduced. Stick to your guns
        Sales tax is also regressive at rates more than 2% but at rates within (0, 2%] the regressive nature is lessened. The old adage “The devil you know is better than the angel you don’t know” explains your observation that only America has seen innovations in business.
        The problem is economists/tax authorities have the tendency to increase the sales tax rate in order to have “money fall like rain” at the expense of business. Practically there are sales values (without the sales tax) quoted which have no profits or margins in them yet they attract sales tax. Sales tax is an indirect tax on the consumer and direct tax on business; that it is an indirect tax on business is a mere propaganda.

      • G B Ahu says:

        Do you know sales tax rate should never have been and should not be more than 2% anywhere in the world should we use the text of Bible on tithe as yardstick?
        You take a tenth of sales value (tax exclusive) as margin of business. Suppose we consider the margin as the harvest. A tenth of the margin works to 1% and as sales tax rate. You know double taxation or punishment is not allowed but in this example we allow it so the maximum should be 2%. There are more examples of proof of this theorem. VAT is not properly understood and defined so wherever it was introduced saw business doors closed not only metaphorically but by tax authorities, example is Ghana in West Africa here.

    3. G Rome says:

      Perhaps the answer to the problem is not to raise a tax percentage, or re-calibrate taxing to include a separate area of the process, but to cease the needless spending of the federal government. Especially at this time in our history, the great amount of money in the hands of individuals will alleviate the strain upon our populace. Does the federal government wish individuals to fail, at the expense of propping up the individual with entitlement programs and social welfare that certainly runs far more expensive due to the ineptitude of an all-seeing government?

      It seems like if a new tax is necessary, it should be addressed more as an "austerity measure" as is being witnessed in many European nations presently. If that is the case, then there should be a sacrifice made by the federal government, as there will certainly be a sacrifice made by the individual citizen — promises of cutting government spending and of maintaining the semblance of a balanced budget should be attached to any concept of increased taxation.

    4. Hugh Taylor says:

      The fact the VAT is even being discussed is scary. I presume the elected elite think they can sneak another on past us. In business we have two ways to increase profitability. Increase revenue is one. Reduce expenses is the other. Our government needs to first work on the expense side of the equation. The spending of our government relative to GDP is generally lower than the countries with a VAT. Those countries enjoy a weak economy and a seemongly high permanent unemployment rate. Why do we want to be like that? We don't.

    5. G B Ahu says:

      Mr. Brian Dooley, CPA. M; your script is ever green. Up to 20111220 the time of writing this piece, VAT is defined in the statues wherever it is levied as Output Tax. In the same statues VAT is defined as Output Tax minus Input Tax and they call it invoice-credit scheme. Tax on Sales paid by Consumers which should be called Sales Tax is wrongly called VAT. The value added tax authorities, technocrats and experts sit the rotten egg. You do not want to be messed up with this money machine which brings money in like rains from the sky at the expense of business spelling the doom of recalcitrant economies no matter how powerful.

    6. In other words, Mr. Brian Dooley, CPA. M; your script is ever green. Up to 20111220 the time of writing this piece, VAT is defined in the statues wherever it is levied as Output Tax. In a EU member state as the UK, for example, in their statues VAT is defined as Output Tax minus Input Tax and they call it invoice-credit scheme. Tax on Sales paid by Consumers at 20% which should be called Sales Tax at 20% is wrongly called VAT at 20%. The paradox is, the VAT is paid by business operators at 20% through the invoice-credit scheme which is hurtful to business when it should have been at 2% or [0, 2%] through the flat and non-flat rate schemes which would be benign to business. The value added tax authorities, technocrats and experts sit on this rotten egg. You, US, do not want to be messed up with this money machine which brings money in like rains from the sky on to their revenue table at the expense of business.

    7. BRIAN DOOLEY says:

      U.K.'s VAT sends Space Ship I and II to California.

      The Golden State is known as anti business. However, compared to the UK, Virgin Air found California as the best place for its Space Ships.

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