Volokh Conspiracy on VAT in USA

Volokh Conspiracy posts on the proposals to introduce VAT into the USA here.

The essence of the post is that VAT is hidden, so it makes it easy to creep up revenues. Therefore it will not serve to reduce the phenomenal deficits of the USA, but  increase government expenditure. As the cousins over the pond are inexperienced in the workings of VAT, I made two comments.

The first was that VAT (at least in the UK ) encourages the black economy, gives opportunities for fraud and is often a tax on tax.

There are a couple of big issues with VAT here in the UK, that the US should be aware of. (NB the rate is 17.5%, soon to rise to 20%)
1. Small businesses do not pay VAT. The current threshold for registration is around $90,000. Therefore sole traders have a big advantage over larger businesses for decorating, plumbing etc. Due to this cost advantage (on top of avoiding around 35% marginal tax rates for self-employed up to $60,000 per year), the black economy is large. VAT exposes people to the fly-by-night rogues.
2. The UK has a large amount of trade with other EU nations. The Intrastat scheme for dealing intra-state VAT is open to fraud. Criminal gangs have made $m’s through carousel fraud. See http://en.wikipedia.org/wiki/Missing_trader_fraud
3. VAT is charged on other taxes. In the UK the current price of gasoline is GBP 1.13 per litre or $6.60 per US Gallon. With VAT at 17.5%, $1 is VAT, and around 60c is VAT on around $3.20 of excise taxes.

There are a couple of big issues with VAT here in the UK, that the US should be aware of. (NB the rate is 17.5%, soon to rise to 20%)
1. Small businesses do not pay VAT. The current threshold for registraton is around $90,000. Therefore sole traders have a big advantage over larger businesses for decorating, plumbing etc. Due to this cost advantage (on top of avoiding around 35% marginal tax rates for self-employed up to $60,000 per year), the black economy is large. VAT exposes people to the fly-by-night rogues.
2. The UK has a large amount of trade with other EU nations. The Intrastat scheme for dealing intra-state VAT is open to fraud. Criminal gangs have made $m’s through carousel fraud. See http://en.wikipedia.org/wiki/Missing_trader_fraud
3. VAT is charged on other taxes. In the UK the current price of gasoline is GBP 1.13 per litre or $6.60 per US Gallon. With VAT at 17.5%, $1 is VAT, and around 60c is VAT on around $3.20 of excise taxes.

On a comment on how wondering how to calculate the average rate of of tax, pointed out it was irrelevent. In theory the accounting is simple. In practice it is enormously complex.

jmaie, although I do not like VAT, the accounting treatment is quite simple. For any business, they charge VAT on sales and pay VAT on purchases.
It is the detail that creates a mindfield of complexity. The effective rate is superfluous.

The following is for the tax accountants and the insomniacs:-

If VAT is 10%, for a $1000 net sale the entries are CR Sales $1000, CR VAT payable $100, DR Accounts receivable $1100.

For a $500 purchase, then DR purchases $500, DR VAT reclaim $50, CR Accounts payable $550.

The business then pays $100 — $50 = $50 in VAT.

In theory the system is simple. With basic accounting software filling in a VAT form takes 15 minutes a month. The effective rate that is paid is therefore irrelevant.

The complexity comes with the exceptions. In the UK we have zero rate; VAT exempt; (One businesses can reclaim VAT on the purchases the other they cannot); non-reclaimable (e.g. business entertainment); and special rates (especially 5% for domestic gas and electricity).
Indeed, a supposedly simple tax has help manuals about as long as for income tax. So I would expect the accountancy firms in the USA are privately backing VAT introduction.

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