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With the November midterm elections approaching in the U.S. and corporate tax reform heavy on the public’s mind, a number of radical solutions have emerged. One such system is the value added tax, or VAT, proposed by former Treasury official and professor at Columbia Law School Michael Graetz, as reported on by Delaware Online.
How it works
A VAT functions very similarly to a consumption tax, with the one exception that it is applied every time value is added. This means that under a 10 percent VAT, a dairy farmer who sells a liter of milk for $1 is charged 10 cents. A cheese plant that turns around and sells that liter of milk as cheese for $3 would be charged 20 cents – 10 percent of the $2 in added value. This process goes on indefinitely until the product is sold to an end consumer.
Benefits
There are two key benefits that make a VAT potentially very attractive in the current environment. The first is that consumption is massive – far larger than any other taxable base. Even a tiny increase in a consumption tax or VAT can produce massive revenue gains for the federal government. The second is that a VAT is designed in such a way that it is virtually impossible to evade. While a business can shift its corporate headquarters abroad or transfer paper assets to a foreign subsidiary, there are few – if any – recourses to paying a VAT.
Detractors
Opponents of a VAT argue that this system is necessarily regressive. While consumption taxation is flat in that everyone buying the same object is paying the same tax, the poor have to devote a higher share of income to consumption than the rich. Graetz’s system attempts to solve this problem by eliminating income tax on households making less than $100,000 per year, but other systems like basic income, negative income taxation and a system of vouchers have also been proposed.
As a business owner and want to further discuss how VAT may affect you contact any one of the attorneys who are members of the Tax, Trust & Estate practice group at Scarinci Hollenbeck for further information.
- Practices: Sophisticated Estate Planning & Wealth Preservation, Tax and Trusts & Estates
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