Apr 132010

European Taxation Soon!

OK, Here’s a Chicago Tribune Op-Ed by Consultant Dennis Byrne and his take on the European-style VAT sales tax that surfaced last year via Speaker of the House Nancy Pelosi. A tax that has been bandied about as a possibility to sop up the massive deficits that an already-broke federal government will need to add to our existing tax burden (Income, property, gasoline, entertainment, restaurant, etc.).  Now, former Federal Reserve Chairman and present Obama Administration financial consultant Paul Volcker allows as how it’s “not a toxic idea.”  This is a standard-length newspaper column, but in case you don’t get to the Trib’s site, I’ve pulled what look like the – literally – ‘money’ quotes for your instant edification.

Of greater surprise and importance about Democratic interest in the VAT is its punitive effect on poor and middle-class Americans. Liberals — at least old-school ones — long opposed sales taxes because the poor and middle class pay a greater percentage of their income for it than the rich. To put it bluntly, the regressive VAT leaves the poor and middle class holding the bag.

Here’s how: The tax is levied at each stage of production. A knitting mill, for example, pays a yarn-maker $1 for the yarn in each sweater. The mill then sells each sweater to Kmart for $3. The value added is $2 per sweater. If the VAT is 10 percent of the added value, the sweater-maker pays a 20-cent tax. Now comes the hitch: The sweater-maker may not have to pay the full 20 cents; when he pays his tax, he can deduct whatever everyone upstream in the supply chain, including the yarn-maker, paid in the VAT. For example, if the yarn-maker paid 10 cents for the value he added to the product, the mill can deduct that from the 20 cents he must pay.

Confusing, yes. But here’s how to keep it simple: Guess who pays the full cost of the VAT? The “end user.” That’d be you, the consumer. Unlike manufacturers, you can’t deduct the VAT paid by previous producers in the supply chain. You pay it all, because it is built into the price you pay for your sweaters, cars, appliances, etc. The sneaky part is that, unlike state and local sales taxes, the national sales tax is not separately listed on your receipt. So, it feels like you’re not paying the tax. From the viewpoint of the politicians, it’s a perfect tax because it is invisible.

You can read the whole Op-ed here.  If you want to really dig into the issue, here’s a link to a one-hour discussion on May 11, 2005, by the “President’s Advisory Panel on Federal Tax Reform.”  Lastly, if you’re self-destructively wonky, here’s a report that’s a joint project of the Left-of-Center Urban Institute, the Brookings Institution and the New America Foundation.  You’ll need some ability to read business equations for some of it, but skimming over it’s 39 pages, you might glean some idea of where this administration may want to go with this, and what they believe the trade-offs would be (Payroll and Corporate Income Taxes).  And, it turns out, there is one more entry that is more accessible and comprehensive than either of the others.  It’s from the conservative American Enterprise Institute and I’m adding it here so that sometime in the distant future, when I really want to get my head around this, I can just hit the link.  You can do it now.  Enjoy.