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What Is Your Opinion About A Value Added Tax?

In the midst of rising unemployment and a surging deficit, the United States government is thinking of ways to increase revenue in order to fund government programs. The government has been considering implementing a fat tax, eliminating capital gains taxes, and raising taxes on higher wage earners. The government is trying everything possible to plug budget shortfalls and raise needed funds. Recently, the federal government has even began considering adopting a value added tax. There has been much debate over whether a value added tax would help or hinder domestic production. Let’s take a look at this controversial proposal known as the value added tax.

What is a value added tax anyway?

A value added tax (VAT) taxes the value that is added at each stage of production of certain commodities. A VAT discourages consumption even moreso than the current sales tax system because it would apply to all goods and services. Many products that you buy off the internet are not subject to sales tax. For example, internet retailer Amazon.com does not charge a sales tax in most states. VAT’s are indirect taxes and they are imposed on every area of production. Manufacturers, distributors, and consumers would all have to pay some part of the VAT. VAT’s discourage consumption because they raise the prices of goods and services. It would apply, for instance, to raw products delivered to a mill, the mill’s production work with those raw products, and so on up the line to the retailer. The tax is initially placed on every stage of production until finally being applied to the end consumer.

Value added taxes are the norm in many European countries, but have never been instituted in the United States. So, why is the US government considering a VAT? Rising unemployment has cut into tax deposits and the government is looking for different sources of revenue to fund entitlement programs. Entitlement programs such as Medicare, Medicaid, Social Security, and veterans benefits make up the bulk of the federal government’s budget. Entitlement spending continues to grow at a faster rate than the federal government’s revenue. The government either has to cut entitlement spending or raise taxes to pay for these programs.

The VAT is being considered in addition to a sales tax. Sales taxes are big revenue boosters for states. They are used to support state and local government projects and services. A VAT, on the other hand, is like a national sales tax where the revenue would go directly to the US government. Therefore a VAT is a form of double taxation. A sales tax at the state level and a VAT at the federal level.

The Good

A value added tax would help us deal with the major economic issues plaguing the United States economy. The money raised from a value added tax could be used to help lower the massive $10 trillion dollar national debt. A value added tax also encourages people to save more money to avoid paying taxes on consumption. A nation with a higher percentage of people saving money is a prosperous nation.

The Bad

A VAT could disproportionally affect the poor. Since the tax will be the same for the rich and the poor; the tax will be a higher percentage of an impoverished person’s income. Taxes on food and clothing will keep poor people from obtaining necessary items needed for survival.

Why are the poor disproportionately hurt? A VAT disproportionately hurts the poor because the tax would eat into their already limited income. For example, let’s say you have 2 different people (Tim and Robert) living in Texas both having to pay a value added tax. Let’s assume that the VAT is 5% on all purchases in Texas. Tim makes $50,000 per year and spends $6,000 annually on purchases such as food and clothing. Tim pays $300 per year in value added taxes ($6,000 x 5% = $300). Robert also lives in Texas but he only makes $20,000 per year. He spends $6,000 on purchases as well. He will pay the same $300 VAT as Tim. But are they really paying the same thing? The VAT is only 0.6% of Tim’s income whereas it is 1.5% of Robert’s income. Even though they are both paying the same amount of money, the VAT is a larger percentage of Robert’s money. VAT’s represent a much larger chunk of lower income individual’s money than other individuals.

Senior citizens and people that live on fixed incomes would also be adversely affected. Another negative is that a value added tax discourages consumption. The US economy is built on consumption and any decline in spending will hurt businesses and its employees.

If businesses aren’t able to cover the cost of the extra taxes by passing it off to the consumer, it may continue to cause higher unemployment, because businesses will lay off more workers to cut costs because of the higher taxes.

How do you feel about a value added tax? Do you think that this is a good time for the US government to impose a value added tax? Would you be in favor of a valued added tax if it led to decreased income tax rates?

(Photo credit: No VAT – Facciamo Breccia)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, "Your Financial Playbook."

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