Wednesday, October 14, 2009

Value Added Tax for the United States?

The possibility of the United States adopting a Value Added Tax is in the news as of late. Here's something from Reuters. Excerpt:

Hank Gutman, KPMG tax principal, director of the Tax Governance Institute, and former chief of staff of the U.S. Congressional Joint Committee on Taxation,will serve as moderator of the panel discussion.

"The realities of the U.S. fiscal situation—including an estimated $1.4 trillion deficit for Fiscal Year 09, projected deficits in excess of 5 percent of Gross Domestic Product and rising demands from entitlement programs—are leading tax policy makers to consider additional revenue sources," said Gutman. "A value-added tax, which taxes the transfer of goods and services, will clearly be on the table as a topic of increasing discussion," he added, pointing out that VAT is one of the world's most popular taxes and is in use in more than 130 countries.

Of course, my focus on the VAT has to do with selling consulting services. Obviously I haven't had to collect sales tax on my services since they are not taxable. I'm not sure this is the case with a value-added tax. Because I'm incorporated and have my corporation pay me for services, won't I have to pay VAT on the difference between my W2 compensation and what I bill per hour? In which case it would seem like increasing my W2 wages would be a good idea to avoid a large VAT. But that would naturally raise income taxes.

So I guess I'll go back to the old standby of raising my rates in case of a VAT. That ought to work. I guess that guy was right about death and taxes. Can't avoid either.

Here's an interesting paragraph from the somewhat shoddy yet nevertheless very informative VAT page on Wikipedia.

Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.

The page also discusses how massive accounting efforts are expended on enforcing a value-added tax, so net revenues from VATs are often lower than projected. Big surprise there. Also the regressive nature of the VAT is criticized, but it notes that the burden of any tax is shouldered most by the consumer except for a progressive income tax.