Archive for December, 2010

VAT in the USA?

Tuesday, December 7th, 2010

The subject has been around for a while but the Obama administration is running out of options to tackle the spiralling National Debt. There is some high profile support for the idea notably from Fed chief Bernanke. This is understandable given the potential revenue such a tax could generate for the Government coffers.There is obviously genuine opposition to the imposition of such a tax and even last May a motion in the US Senate was defeated 85 to 13.
However, as with all politicians faced with a dwindling number of alternatives the idea eventually focuses the minds otherwise.
It also has something to do with the sheer scale of the problems facing the administration.

The American Dream is being replaced by the American Nightmare!

The current US National debt is $13.86 Trillion, which is equivalent to $45,000 per person and the total is rising by $4.16 Billion a day.
At what point does the US go bust?
How long can it sustain such levels of Debt?
How long can it afford to pay the level of interest due on a debt that size?
Has the US mortgaged its future prosperity and for how many generations?
The US needs to find an ongoing reliable source of income to erode the Debt down and an obvious if unpopular option is to tax more.

So what is VAT?

VAT is a national sales tax on goods and services
First adopted by France in the 1950s VAT or Value Added Tax is calculated as a percentage of the selling price. VAT is applied to most purchases including cars, petrol, electrical goods, furnishings, any luxury items, clothing etc and on any service activities. Businesses trade off VAT they pay for purchases of goods or services with the VAT they must charge for their products. The money goes to the Government but there is a mechanism to offset one against the other and businesses that are VAT registered only pay the net difference between VAT charged and VAT paid.
VAT is commonly shown separately on invoices and receipts so that businesses can claim against any VAT they have paid out.
Consumers just notice the increased prices and cannot claim VAT back.
There are usually exemptions such as baby products and sometimes different rates are applied such as take away food being levied at a lower rate than sit-in restaurant meals.

One interesting exemption from VAT in Europe is Investment Gold.

This is an EU wide agreement that applies to all Gold Bullion which is not less than 995 thousandths pure.
It also includes Gold Coins minted after 1800 that :

* are of a purity not less than 900 thousandths
* are or have been legal tender in the country of origin
* are normally sold at a price not exceeding 180% of the open market value of gold contained in the coin.

Hopefully the USA may follow this trend or investors will turn to European suppliers who sell VAT free Gold.

There are 139 countries, including most major economies except the US, that levy a VAT style tax. It is thought that VAT is a better alternative of increasing tax revenues because is does not discourage investment in the way that higher income tax can.

Typically, rates of VAT are between 15 to 20 % in Europe.
The UK is due to raise its VAT from 17.5% to 20% in January 2011 as part of its deficit reduction measures.
Here are some actual rates in developed economies – Italy 20%, France 19.6%, Germany 19%, Australia 10% and Japan 5%.

What will be the rate in the US?

No-one can be quite sure exactly where they are hoping to pitch the level of VAT but the numbers involved are quite tempting.
Various estimates exist including:

* a level of 5%VAT will raise $161 Billion in 2012
* for each 1% VAT levied in USA, $70 Billion will be raised. Therefore 10% VAT would harvest an extra $700 Billion which is quite an attractive offer for the Obama administration.

Concerns have been raised for the less wealthy who will find a disproportionate increase in taxation compared to their salaries. This is true and is the case in other countries but whilst Governments express concern and promise to “evaluate” the impact, the cold facts (hard cash) tend to provide a compelling argument.

So will President Obama opt for “Change” and start clawing back some cash to repay the National Debt. Some commentators dismiss the issue saying he couldn’t possibly get away with it.
Well, I’ve got news for them, in his own words “Yes We Can!”

Paul McGowan



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