Foreign Import: Is the U.S. Headed for a Value Added Tax?
Even as the economic meltdown of the past two years shows signs
of improvement, Americans are faced with an economic crisis of a
different sort. New government spending, on everything from the
economic stimulus to health care reform, means federal deficits
are heading toward record highs.
Assuming that tax revenues and spending remain unchanged, the Congressional
Budget Office projects deficits of $600 billion or more per year
between 2011 and 2020.
To stem the rising tide of red ink, elected officials are faced
with the usual choices:
1. Cut Spending – Never a popular or politically expedient option,
especially in an election year.
2. Raise Current Taxes – This is already happening at the federal
and state levels.
- Federal income tax rates are scheduled to increase for high
- Several states are considering expanding their sales taxes to
include service providers like attorneys, architects and accountants.
- Health care reform legislation contains provisions to impose
“penalties” (a.k.a. taxes) on individuals who do not purchase
health care coverage, and on large and mid-sized employers that
do not offer it to employees. Those with very expensive “Cadillac
plans” will pay a 40 percent excise tax starting in 2018.
- High income individuals face an additional tax and an additional
3. Introduce New Taxes – Another unpopular notion, but one that
is gaining ground as the deficits continue to grow.
Importing the VAT
It is the third option that has some looking to the example set
by more than 100 foreign countries with various forms of a value
added tax (VAT). Most of Europe, Japan and Canada are among the
nations that have used a form of value added tax for decades to
support government programs. Although a U.S. VAT has been considered
in the past, advocates now say it may be the only way out from under
current and future deficits. Of course, new taxes never come without
debate or controversy, and proponents on both sides of the VAT issue
have been out in force. Some believe a VAT is inevitable, although
maybe not in the immediate future. Others are steadfast in their
opposition and skeptical of the fairness and benefits of such a
scheme. At this writing, neither camp had succeeded in formally
introducing a VAT, nor have they completely eliminated it from the
realm of possibility.
What is a VAT?
A VAT is often called a consumption tax and works much like a sales
tax. There is one major difference: Instead of the tax being levied
on the final retail sale to the consumer, a VAT is collected at
each stage of the production chain as “value” is added to the product.
In the very simplest scenario, the government with a VAT collects
the same amount as it would with a more traditional sales tax. But
because each individual or business along the way is able to take
credit for the tax paid on its own purchase of goods, the end consumer
ultimately pays the full amount of the tax.
It sounds complicated, but a VAT is actually easier for the government
to collect than a sales tax because of the multiple levels of accounting
and reporting. It becomes complex when interest groups begin lobbying
for exemptions and special rates on certain purchases. Unlike the
income tax, which has individuals with higher income paying more
tax, a VAT is considered by some to be a regressive tax because
it applies equally to everyone, regardless of their income.
Here’s How a VAT Works
Start with a broad-based VAT of 10 percent. A farmer grows some
wheat, then sells the wheat to a baker for 20 cents, plus a 10 percent
VAT, for a total of 22 cents. The farmer sends 2 cents in VAT to
The baker now turns the wheat into flour and bakes a loaf of bread,
which is sold to a grocery store for 66 cents. Six cents of that
total (10 percent of 60 cents) is VAT. The baker collects the 6
cents in VAT from the store, but sends only 4 cents to the government
after taking credit for the 2 cents paid when the wheat was purchased
from the farmer.
Along comes the consumer, who buys the loaf of bread from the grocery
store for $1.10, which includes $1.00 for the bread and 10 cents
in VAT. The grocery store collects 10 cents in VAT, but takes credit
for the 6 cents paid when the loaf was purchased from the baker.
The store sends the government 4 cents.
In the end, the government collects 2 cents from the farmer, 4
cents from the baker and 4 cents from the store. That adds up to
10 cents, which is 10 percent of the final sale price of $1.00.
Since everyone along the way received a credit for taxes paid except
the consumer, it is the consumer who actually shoulders the burden
of the tax. Generally, the tax applies to everyone who “consumes”
goods and services, regardless of their income.
In this basic model, the same principles would apply to all goods
and services. In reality, it is likely that there would be exemptions
and exceptions that would complicate the calculation and collection
of the VAT.
Implementing a VAT in the United States
As simple as a VAT is in theory, it would require a whole new way
of thinking about taxation if it were to come to the United States.
Changes in tax accounting, auditing, wholesale and retail pricing,
reporting and fraud prevention would all need to be implemented
in virtually every organization.
In Europe, where VAT has been a part of the business landscape
for decades, tax professionals acknowledge that passing and implementing
such a tax on this side of the ocean would be difficult.
“It would take a tremendous effort to implement a VAT in the United
States,” says Arnold Stange, tax and legal partner with HLB Stueckmann
in Bielefeld, Germany. “There are implications for businesses that
you can’t even imagine.”
- Invoices and the computer software that produces them would
need to be updated to reflect VAT paid on every transaction for
goods and services
- Pricing, from retail shops to manufacturers, would trend upward
in order to include VAT as a component of total cost
- An elevated risk of fraud would require enhanced internal control
- Rise of black market goods and services purchased with cash
and bypassing the system
- Training/retraining of internal and external tax professionals
- Implementation of new income reporting procedures and schedules
Problems with a VAT
As attractive as a VAT may be to some, it also has plenty of detractors.
Among them are those who point out the fact that all but a few states
already have a sales tax, which is often the state’s primary revenue
source. States may be unwilling or unable to repeal their sales
tax in order to make way for a federal tax. Adding a federal VAT
on top of the state sales tax could significantly increase the cost
of goods and services for consumers.
Advocates for low-income taxpayers also point to the potentially
regressive nature of the VAT tax — a person with $50,000 in annual
income pays the same rate as a person with $1 million in annual
income. In practice, the tax is relatively fair considering the
higher consumption of more and higher priced goods and services
by those with higher incomes.
Spend More, Tax More
Consumption taxes like a VAT have been around for decades. So why
all the sudden talk about a value added tax in the United States?
Because government spending is rising much faster than revenue.
The 2009 economic stimulus, health care reform, and existing entitlements
like Medicare and Social Security are predicted to produce record
deficits in the coming years, as high as $600 billion annually,
according to the Congressional Budget Office. Left unchecked, this
level of spending without accompanying program cuts and/or new revenue
streams is considered by many to be unsustainable.
The VAT is often called a “money machine” because of its potential
to generate billions of dollars in revenue. Statistics from the
U.S. Bureau of Economic Analysis show personal consumption of goods
and services in 2009 was about $10 trillion. Even a 1 percent VAT
could produce as much as $100 billion in revenue.
VAT in Other Countries
The United State is the only industrialized nation without a VAT.
The Organization for Economic Cooperation and Development (OECD)
lists more than 130 countries that use a VAT. Here are the standard
rates in a few of them.
Standard VAT Rate*
*Rate may be lower on certain goods and services – food, books,
public transportation and medical services, for example. Others,
like not-for-profits, may be exempt from paying VAT.
Source: Organization for Economic Cooperation and Development
Clifton Gunderson Expands International Tax Capabilities Through
In a strategic move designed to expand its international tax capabilities,
Clifton Gunderson is combining resources with U.S. Tax Advantage
(USTA), an international tax consulting services firm based in Chicago.
As a result, Clifton Gunderson has more direct access to international
tax resources and expertise, and enhanced information sharing across
all tax specialties.
“This is an important strategic investment for our firm and it
will benefit the clients of both companies,” said Krista McMasters,
Clifton Gunderson CEO. “The acquisition strengthens our presence
both internationally and in our tax practice, and highlights our
commitment to providing the highest level of talent available to
meet the growing international needs of our clients and future clients.”
Clifton Gunderson has a four-year history with USTA as one of its
largest clients. The firm’s partners and staff have a solid reputation
for quality service and expertise in assisting mid-market and Fortune
1000 companies with their international tax requirements.
Mark Gasbarra, national managing director of USTA, will join Clifton
Gunderson as managing partner of the firm’s Global Tax Services.
Clifton Gunderson will continue to operate the international tax
consulting services under the USTA name, at offices in five major
“Mark has a keen understanding of many of our tax partners through
our four-year alliance,” said McMasters. “He has a history of innovative
tax solutions using methods that translate to other tax consulting
services and solutions. We are eager to leverage his leadership
and experience to help improve our international tax consulting