Thursday, May 13, 2010

The Pros and Cons of Value Added Taxes

A few weeks ago the U.S. Senate rejected a proposal to institute a Federal Value Added Tax (VAT) with an 85-13 majority vote. Although common throughout Europe these taxes are highly unpopular in America. The Senate’s decision was significant, as it is the first time either of the Congressional chambers have sent a strong message against a Federal VAT.

It was important for the Senate to go on record voting against a VAT as President Obama’s debt commission is considering a handful of tactics to improve the country’s debt problems. The commission – which is made up of eighteen members including six Senators – is expected to submit a report later this year on how to deal with the country’s financial problems. All six of the Senators in Obama’s commission voted against a VAT. Since the President’s rules assert fourteen of the eighteen members must agree on the commissions final recommendations, it is very unlikely that a VAT will be included in their proposal.

Since we have been hearing so much about a Federal VAT over the past few years, I wanted to take a minute to review some of the largest pros and cons of such a tax with all of my blog readers.

PRO: Increased Revenue

Obviously, the largest benefit of any new taxes would be an increase in federal revenue. Currently, only state and local government agencies charge taxes on purchases, but by instituting a VAT the federal government could benefit from consumer spending as well.

CON: Regressive Tax System

Compared to our current tax system a VAT would be considered significantly regressive, meaning they benefit higher income taxpayers more so than those living closer to the poverty line. As we have all seen from recent headlines 47% of Americans pay little or no federal income tax. However, if the government instituted a VAT many more would pay federal taxes.

PRO: Easier Tax System

The U.S. tax system is very complicated and confusing. More and more Americans pay for professional tax help each year because of how complicated U.S. tax law has become. Proponents of a VAT suggest that it would make taxes more efficient and easier for taxpayers to understand.

CON: Higher Probability of Fraud

Although tax fraud is a serious issue currently facing the Federal government, many experts predict that since a VAT would create a more open system, that would likely lead to increased fraud. Additionally, the change from our current tax system to one with a VAT would be very difficult and time consuming, with lots of opportunities for fraud.

PRO: Lost Online Sales Taxes

Online stores such as, often get out of charging consumers sales taxes because of a 1992 Supreme Court ruling that retailers must have a physical presence in the state to collect excise taxes. However, some experts claim that a VAT could solve this problem of lost online sales taxes by levying taxes on all sales, even online sales.

CON: Less Revenue Than Expected

Unfortunately, it takes government agencies a lot of time and money to enforce VATs. In some countries, the VAT has generated significantly less revenue than expected because of the hefty enforcement costs. As such, it is hard to predict how a VAT would impact federal revenue since there is no way to predict how much the change, and ensuing enforcement would cost.

Blog Archive