A value added tax, or VAT for short, really is a money machine. It is a tax that is imposed to a buyer through every stage of the supply chain. It also applies to the sale of a product or service like a sales tax. It becomes a tax that becomes part of the retail price. You’ll find VAT in all European Union countries, Canada, and others, but it is not in the United States.
What are the value added tax pros and cons? Here are the reasons why some support this type of tax, while others are strongly opposed to it.
What Are the Pros of a VAT?
1. It can change complicated taxation systems.
In the United States, the 2016 tax code consists of over 74,000 pages of rules and regulations. That makes it difficult for the average person to navigate through their tax responsibilities. With a value added tax, the system can be changed so that it becomes a little easier to understand. Who has time to read 500 million words of tax code anyway?
2. It would offer the opportunity to generate new money.
When online sales take place, there are several scenarios where a consumer in the US would pay zero in taxes for their purchase. With the presence of a VAT, this would change because the tax would be applied on a national level. All sales, including online sales that may not see a state-imposed sales tax, would generate extra money.
3. It creates more incoming revenues.
There are critical programs that every government runs. The importance of each individual program may be up for debate, but with the funds generated by a VAT, those programs can be properly funded. A VAT can also provide essential services to communities, be used for deficit reduction, and for other designated purposes.
4. Most tourists forget to apply for a VAT refund.
All sales have a VAT assigned to them when a purchase is made. Most VAT tax regulations allow for those who live outside of the country to apply for a refund of the tax that was paid. It is something that is often forgotten about, which means this is a source of extra revenue that can be accessed. Because detailed receipts are also required, some may not even qualify for a refund application and not even realize it.
What Are the Cons of a VAT?
1. It is usually a tax that is very regressive.
Most of the tax dollars that are generated by a VAT come from those who can least afford to pay them. The poorest percentages of a socioeconomic system tend to pay a higher overall percentage of their income to the VAT than their wealthier counterparts.
2. It is a tax that is usually added to other taxes.
In the United States, a VAT would most likely be added in addition to a state sales tax. If there is a 6% sales tax and a 4% VAT is added, then a $10 item would cost $11 for a consumer instead of $10.60. On big ticket items, that’s a difference that can really add up quickly.
3. It would become an administrative burden to businesses.
When a VAT is added, it changes the retail price point of every item and service that is offered. The VAT would need to be calculated for every step of the process that it takes to create a product or offer a service. Then these added costs would be put into the final product price, which causes the consumer to pay for all of the added taxes. Then the consumer has a final VAT that they must pay when finalizing their purchase.
4. Not everyone may need to pay a VAT.
Many VAT systems offer businesses the opportunity to apply of a tax exemption. This means they would not need to pay the value added tax on items that are being used that will be eventually sold to a consumer. This means a majority of the tax burden will be on individual consumers, with exempt businesses essentially getting a free ride when a consumer has no access to apply for such an exemption.
The value added tax pros and cons can often inspire a passionate debate. It is a system that can raise a lot of cash, but does it come at the expense of those who have the greatest needs? That is a question that every community must answer if looking at a VAT as a potential financial solution.