financial discussions with the girl next door

Value Added Tax December 8, 2008

Filed under: Uncategorized — girlnextdoorfinance @ 10:55 pm

Last week on CNN Money, there was an article about value-added taxes. According to the article, a value-added tax (or VAT) “is essentially a sales tax, except that it’s charged at each stage in the development of a product instead of at the moment when the product is sold.” While the tax is essentially paid by the consumer (a higher end price is the result of the tax), it is collected through every stage of production, so it is a “hidden charge” which generally doesn’t cause a lot of fuss among consumers. Consumers would have no idea how much of the final cost of the product has gone to taxes, unless the government decided to explicitly state it.

The article makes it sound like a VAT will be the only option for raising government funds in the future, given that the US government spending is rising far faster than tax revenue. This is of concern to me (and should be of concern to you) for several reasons. The article points out that middle-class taxpayers will be hit the hardest, since those with higher levels of income spend a smaller percentage of their income on necessities (food, clothing, etc.). Hurting the middle-class is what the Democrats are trying to avoid, and it seems that implementing such a system without hurting the middle-class will be complicated at best. The article also points out that while high government taxes and spending can result in fiscal stability, entrepreneurship suffers. When small and home-based businesses are forced to pay higher taxes, fewer people are willing to take entrepreneurial risks. Also, under the tax, businesses would be acting as tax collectors for the government and have significantly more paperwork and accounting hassles (and costs) to worry about. Every dollar a business pays to taxes (or accounting costs!) is a dollar that cannot be re-invested in that business. This slows down growth and leads to fewer jobs being created.

According to various sources, VATs often lead to higher overall tax burdens for consumers. (If you look at overall tax burdens in Europe, you will see that they have increased greatly since the addition of VATs, which the tax burden in the US has stayed relatively constant.) When governments have more tax revenue, they spend more money. The cycle doesn’t end when governments increase tax burdens and raise more money, rather, it perpetuates. Also, countries that implement VAT systems are very unlikely to lower any other taxes. Check out this article from The Heritage Foundation for a lot of great information about VATs. If you’re a visual person, the Heritage article has a lot of great charts and graphs based on information from the Organization for Economic Co-Operation and Development.
(Note: The Heritage Foundation is a conservative policy research group. By linking to this site, I am not saying I agree with their views on the many topics they write about. I am simply pointing you toward interesting information about VATs. If you cannot stand conservative policy, proceed with caution! Regardless of your political views, I highly recommend you check out the article to view the graphs from OECD.)

Do you think a VAT would be a good way to fund government programs? Is it “more fair” than the current tax system? What do you think are the positives and negatives of a value-added tax? Is this something you see as inevitable for the US government?


3 Responses to “Value Added Tax”

  1. Jeffy Says:

    Stephanie, I completley agree with you, and instead of going into details on here, and getting people’s blood pressure cooking, we can just talk when you get home ;)

  2. Joyce Says:

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


  3. girlnextdoorfinance Says:

    Thank you Joyce! I’m glad you are enjoying the blog!

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