Can the U.S. learn from New Zealand when it comes to taxes?

Is it time for the U.S. to consider the value added tax (or VAT)—the consumption tax widely used across the Atlantic? I guarantee, it will be a big debate. The head of President Obama’s Economic Recovery Advisory Board, Paul Volcker, stated in an article on CNN, “If at the end of the day we need to raise taxes, then we need to raise taxes.” So, the United States happens to be the only developed country that does not have this VAT (value-added tax), as it is called. Yet, the United States has a $1.5 trillion federal deficit and a debt of more than $12 trillion. Economist argue this tax would “pack a less potent punch” than a rise in income taxes or corporate taxes.

So, what country does it best? Tax experts and economists point to New Zealand, where a 12.5 percent goods and services tax applies uniformly to nearly everything with very limited exceptions--only rent paid for a private home, charitable contributions and interest earned are exempted. (The government offers clear details, too, on its website). “People think it’s fair because it doesn't exempt some folks and not others."

The 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.

You can bet that deciding what model to use in the United States, or whether the tax will be imposed at all, “will be a furious political debate in the coming months”. Conservatives and tax opponents hate it of course. "There's nothing to love. It will only lead to bigger government," says Daniel Mitchell of the libertarian Cato Institute.

In New Zealand, the value-added tax contributes about 25 percent to the government's bottom line, and the Tax Policy Center in December projected that a 5 percent VAT tax here would generate over $3 trillion in revenue by 2019. That's not enough to cover America's huge debt obligations, of course, but it could be a start. I feel the VAT would cause business owners to be ultimately “holding the bag”. Other things to ponder are what would be exempt from the tax and how it will affect low income Americans versus the wealthiest.

Read the full article here.

Another CNN article explaining the VAT

Watch my appearance on FOX Business regarding the topic from Monday, April 12, 2010.

Taxes to Watch Out for in 2010

During 2009, the country’s economy has gotten worse, unemployment rates increased, and the Senate recently increased the Federal government’s debt ceiling. With two ongoing wars and a new health care reform plan, combined with record low tax revenues, Congress is going to need to find ways to increase Federal revenue. Senators and House of Representative members are on a Winter break for now, but when they return on January 20, 2010 they will decide the fate of a slew of tax law changes. To help my readers stay ahead of the game, I have put together this article on taxes to watch out for in the New Year.

Value Added Taxes

I have warned about the possibility of a value added tax (VAT) in several blog entries throughout the year, and every day it becomes a more likely possibility. The benefit to the government is that a VAT could generate billions of dollars in revenue. It is meant to add taxes to manufacturers but consumers always end up paying higher prices as a result. Proponents claim that increased tax credits for low-income families would help with the added VAT burden, but in today’s economy consumers are not spending like they used to. If a VAT was implemented it would almost certainly reduce consumer spending.

Fair Tax

You may remember hearing the phrase “fair tax” during the recent presidential election. Republican candidate Mike Huckabee was a large supporter of this tax, which would pretty much eliminate the current tax system, and possibly even the IRS. It may sound nice, but to make up for the lost revenue the Federal government would need to impose a 23 to 30% tax on the purchase of all goods. Although supporters say that the price of products would decline without payroll or corporate taxes, there is no way to know what the “break even” point would be. This new type of tax is unlikely to come to fruition in 2010 as there are no bills currently being debated in Congress. However, it may gain traction as a campaign talking point during the run-up to Congressional elections in late 2010.

Estate Taxes

As I explained earlier last week, Congress failed to take any action on the estate tax. This means that in 2010 there will be no estate tax levied whatsoever, unless Congress passes a retroactive bill. However, beginning in 2011 the estate tax will return and target even more taxpayers. If current laws are not changed, in 2011 the estate tax will return to a historic rate of 55%, and it will get levied on all estates valued at $1 million, which would represent the highest estate tax since the early 1990’s. Unfortunately for anyone inheriting a sizeable estate in 2010, Democratic leaders in Congress have vowed to deal with the estate tax as soon as they return to session, which could result in a permanent 45% estate tax rate.

War Taxes

It is widely known that military spending, especially during a war, adds up quickly. Over the past eight years, the costs of the military efforts in Afghanistan and Iraq have cost an estimated $1 trillion. As such, David Obey, (D – WI) – chair of the House Appropriations Committee – has proposed a war surtax that would range from an additional 1 to 5% income tax on the highest-earning households. Not surprisingly, there is a lot of opposition to this tax, and many experts claim that unused TARP funds could be used to pay for the military costs. On the other hand, some insist that a war tax would create a nationwide sense of urgency to end the wars.

Taxes on Stocks

One of the more popular revenue-raising ideas on Capitol Hill is to tax the sale of financial instruments like stocks, options and derivatives. The main proponents of the bill are two Democratic House members – Ed Perlmutter and Peter DeFazio – who have titled their bill the “Let Wall Street Pay for the Restoration of Main Street Act of 2009.” It would be a 0.25% tax on purchases of securities, and could potentially raise $150 billion per year. Supporters claim that the bill would deter investors from making risky moves, while critics are concerned that such a tax could lead to a market crash and ruin the country’s economy.

IRA's in 2010

Unfortunately it looks like life is going to change drastically for anyone with an IRA in 2010. Starting in the New Year, income limitations will disappear for individuals hoping to convert to a traditional IRA or tax deferred retirement plan into a Roth IRA, which lets taxpayers take untaxed withdrawals. The previous limit had only allowed taxpayers making $100,000 or less to take advantage of a Roth IRA conversion.

Patient Protection and Affordable Care Act

Like my blog entry last week on the Senate’s health care bill explained, any type of health care reform is going to lead to increased taxes. In the current legislation there are taxes on tanning salons, “Cadillac” health care plans, fees on businesses that do not provide coverage and a Medicare tax increase for individuals making over $200,000. As the House and Senate work to come up with a bill that can pass through both houses, all taxpayers should pay close attention to the tax increases that will undoubtedly accompany the legislation.

Employee Health Benefits

Although the health care reform bills do not contain any taxes on employer-provided health care, the House’s legislation does include a section that would make employers show those health care benefits on employees W-2s forms. There has been a lot of discussion in Washington about taxing employer provided health benefits, and it is definitely an issue everyone should watch out for.

Marijuana Tax

Over the past year there has been more and more interest in taxing the sale of marijuana. Earlier in the year Oakland, California became the first U.S city to institute a tax on marijuana sales, with 80% of the voters approving. Professor Jeffrey A. Miron of Harvard University estimates that the legalization and taxation of marijuana in the U.S could easily raise $2.4 billion a year, taking a large chunk out of the deficit. However, many suggest that the additional costs associated with legalizing cannabis would outweigh the potential for revenue. For example, the U.S. collects nearly $8 billion per year in alcohol taxes, but the overall cost of alcohol-related problems to the government is over $70 billion. This new type of “sin tax,” is highly controversial, and also probably unlikely to be an issue Congress faces in 2010. However, it – like the Fair Tax – may come up during the run-up to Congressional elections in late 2010.

Many See the VAT Option as a Cure for Deficits

From NYTimes.com:

Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services.

Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers.

“We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.”

The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt.

Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers.

Latest Good Reads

Meltdown 101: Value-Added Tax on Washington Radar

Getting a Bang for the Buck

Is Obama's Tax Reform Panel Fizzling Out?

PA's "Filial Responsibility" Law in the News

Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look

For the first time in history, the United States Congress is rumored to be considering a value added tax (VAT), a sort of National sales tax. Check out the article below on the topic courtesy of the Washington Post.

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama's policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off -- maybe. Or you could pay for it progressively and they'd come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.