VAT Concepts
VAT stands for value added tax. This type of multistage tax on goods produced has achieved widespread adoption in several countries worldwide, though as yet the United States has yet to employ such a system. A VAT passes taxes on a given product through the manufacturing pipeline, raising the price of the product during the production phase instead of adding a separate sales tax at the time of purchase.
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Initial Concept
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According to Former Treasury Department adviser and Forbes contributor Bruce Bartlett, a German businessman named Wilhelm von Siemens first developed the VAT concept as a response to the double-levying of manufacturer excise taxes commonly seen after the First World War. Siemens envisioned a chain of tax payments in which each link in the production chain would receive a credit for taxes previously paid in the production chain, eliminating double taxation.
Process
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According to CBS News, most value added tax systems assess a tax on a product at multiple stages of its production, including materials purchasing, manufacturing, shipping and retail sale. Each participating company keeps a record of the entire taxation chain, deducting the tax payment made at the previous point in the chain to calculate its own VAT. The accountability and visibility of the VAT chain makes cheating on payments almost impossible. At the same time, the fact that the VAT does not appear on shoppers' receipts allows it to recede from public consciousness.
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Rates
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VAT rates vary from nation to nation, ranging from Japan's five percent rate to the 25 percent rate seen in Sweden and Hungary, according to Worldwide-Tax. Some European countries have introduced a VAT at a relatively low rate and then raised the rate as needed over time. Among the Americas, Canada currently imposes a five-percent VAT, while Brazil's VAT ranges from 17 to 25 percent.
Variations
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Because a flat-rate value added tax would hurt lower-income citizens more than higher-income citizens, some proponents have suggested combining it with other reforms to the current tax systems. Michael Gratz, a law professor at Columbia University, has suggested combining a VAT of 10 to 14 percent with reductions in income and corporate taxes at all income levels, with people earning less than $100,000 per year paying no income tax.
Pro and Cons
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Proponents of a value added tax for the U.S. point to the unlikeliness of resolving the country's ever-widening fiscal debt through traditional methods such as increased taxation of upper-income households or continued spending cuts. Bartlett has stated that a VAT would ensure that all U.S. consumers pay some form of taxes while providing the U.S. with an additional stream of revenue. Opponents point to the proportionally greater tax burden imposed on lower-income earners and the fact that a VAT automatically raises prices for everything, sometimes substantially.
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References
- Photo Credit tax forms image by Stephen VanHorn from Fotolia.com
