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This tax brings billions of dollars worldwide.Why there is no VAT in the US

The word “tax” was stamped on May 10, 2021 at the headquarters of the Internal Revenue Service (IRS) in Washington, DC, USA.

Andrew Kelly | Reuters

Many in Congress want to fix the country’s collapsing roads, bridges, and other infrastructure projects.

Lawmakers have not yet agreed on how to pay for it.

In addition to reforming the inheritance tax, President Joe Biden is calling for tax increases for the wealthy, including higher income and capital gains, and stronger IRS enforcement.

Other policy makers have highlighted Biden’s tax alternatives, such as the White House’s already opposed gas tax hike.

However, there are other financing options that were lacking in negotiations. It is a value-added tax (VAT), which is an obligation on goods and services at each step of the supply chain.

“The United States is the only major country without VAT,” said William Gale, co-director of the Urban-Brookings Tax Policy Center.

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How VAT works

VAT is similar to retail sales tax, except that it is taxed at each stage of the production process. There is no one tax levied at the end.

For example, suppose a farmer grows $ 100 of wheat and sells it to a bakery. If the sale has 20% VAT, the bakery will pay $ 120 and the farmer will send $ 20 to the government. If a bakery sells $ 5 bread, there is an additional $ 1 per loaf for VAT.

When the bakery submits the tax return, it will send the bread a $ 1 VAT payment and charge the farmer a $ 20 credit for the VAT paid. However, VAT paid by consumers does not have credit.

Wojciech Kopczuk, a professor of economics at Columbia University, said the VAT system creates a “self-reporting mechanism” in which each company documents the activities of other companies, leading to a higher level of compliance.

Other tax “hard workers”

Another reason VAT works so well is that its tax base is relatively stable, said Daniel Bunn, Vice President of Global Projects at the Tax Foundation.

“The government will not see big fluctuations in tax revenues each year,” he said.

Of course, the pandemic may have been an exception.

“But even in a pandemic, sales tax revenues don’t fluctuate as much as revenues,” Van said.

According to reports from the Brookings Institution and the Urban Brookings Tax Policy Center, VAT is the third largest source of income for other Organization for Economic Co-operation and Development countries, after personal income tax and taxation on social security type programs.

“It was the mainstay of Europe’s tax system,” Gale said.

He added that VAT is also effective in developing countries because it is easier to manage and enforce than income tax.

However, there are unique challenges associated with implementing VAT.

According to Kopczuk, in many countries certain products and services, such as essentials such as food and medicine, are excluded from VAT. Inconsistencies can occur between the excluded products, which can burden some companies.

In addition, there are cases of tax evasion, especially for cross-border purchases where someone receives a VAT tax credit paid outside of their home country.

Some companies have created fake invoices to charge VAT credits for purchases along the supply chain, but this never happened.

“For example, in China, that’s a big problem,” Kopcuk said.

Despite these issues, he said VAT is making a lot of money and seems to be working pretty well.

Why there is no VAT in the US

While VAT is profitable elsewhere, this levy faces US political hurdles, Van said.

While some Democrats consider VAT a regressive tax because it attacks families regardless of income, Republicans could fight widespread tax increases, he said. In addition, sales to state lawmakers without sales tax may be difficult, Mr. Van added.

According to Kopczuk, VAT logistics can also cause a backlash from the business community.

This tax brings billions of dollars worldwide.Why there is no VAT in the US

Source link This tax brings billions of dollars worldwide.Why there is no VAT in the US

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