Does Everyone Understand the Difference Between a VAT and a Retail Sales Tax?

Nerds 4 Cain ^ | 10-14-11 | OnTheOppositeShore

[Brookhaven]

It seems that the 999 plan is receiving a lot of unfair criticism, because many people don't understand the difference between a value added tax (VAT) and a retail sales tax. I'm going to try and describe the difference here, using the milk supply chain as an example.

A retail sales tax (this is what is in the 999 plan)

1. A dairy farmer sells their milk to a processor. No taxes are levied or added to the price of the milk.
2. The processor sells the milk to a wholesaler. No taxes are levied or added to the price of the milk.
3. The wholesaler sells the milk to a grocery. No taxes are levied or added to the price of the milk.
4. The grocery puts the milk on the store shelves. No taxes are levied or added to the price of the milk.
5. A parent buys the milk to put on their cereal at home. At the cash register, a sales tax is levied on the price of the milk. The sales tax shows up as a separate line on the cash register receipt.

The one and only place where a tax is levied on the milk is after it has reached the cash register for it's final purchase before being consumed—a retail purchase.

From a conservative standpoint, the great advantage of a retail sales tax is that it is 100% visible. The tax payer can easily determine how much they are paying in taxes.

A VAT (value added tax)

1. A dairy farmer sells their milk to a processor. A tax is levied on the milk, and it is embedded in the price the farmer charges the processor.
2. The processor sells the milk to a wholesaler. Again, a tax is levied on the milk, and it is embedded in the price the processor charges the wholesaler.
3. The wholesaler sells the milk to a grocery. For a third time, a tax is levied on the milk, and it is embedded in the price the wholesaler charges the grocery.
4. The grocery puts the milk on the store shelves. For the fourth time, a tax is levied on the milk, and it is embedded in the price of the milk displayed on the shelf.
5. A parent buys the milk to put on their cereal at home. At the cash register, no taxes are levied on the milk. The four taxes that have already been levied on the milk do not show up as a separate line on the cash register receipt.

With a VAT, every time a product or raw material changes hands it is taxed, and the tax is embedded in the price of the item. If it changes hands five times before it reaches the consumer, it is taxed five times. If it changes hands 100 times before it reaches the consumer, it is taxed 100 times.

Conservatives are right to abhor a VAT.

A VAT is a hidden tax. The consumer never knows for sure how much in taxes they are paying, because the tax is embedded in the price of the product. That, of course, is why governments love the VAT. Voters are less likely to complain about a tax when it is difficult for them to determine exactly how much they are paying in taxes.

A VAT creates a paperwork nightmare for businesses as they have to keep track of the taxes that have been paid on items and raw materials all along the production process.

It's not surprising that Europe (which has a bias towards high taxes) prefers a VAT, because it is a hidden tax and thus easy to raise. While the USA (which has a bias towards low taxes) prefers to implement retail sales taxes, because it is a highly visible tax and thus difficult to raise.

I hope this makes the difference between a VAT and a retail sales tax clear. They are very different animals.

The Herman Cain 9-9-9 plan implements a retail sales tax. In no way, shape, or form does it implement a VAT.

[Pontiac]

The Herman Cain 9-9-9 plan implements a retail sales tax. In no way, shape, or form does it implement a VAT.

I still don’t like any tax that is not collected by government directly.

Sales taxes are sneaky. The get you a little bit at a time. No one ever keeps all of their receipts and adds up the amount of sales tax they pay over a years time.

I also do not like the fact that a merchant has to collect these taxes and forward them to the government. This places a burden on the merchant that he should not have to bare. The merchant spends his time with record keeping, filing forms and sending the check to the government quarterly. The merchant is also subject to audits and is in jeopardy for fines and imprisonment for failure to file the forms on time or submit payment on time.

Taxes should openly and acutely painful for the payer so that he is well aware of what government is costing him. If there is pain endured by the citizen when he pays his taxes he will let his representative in government share his pain with him and hopefully tax increases are therefore rare.

[An.American.Expatriate]

Absolutely WRONG!

VAT is “added” (by the seller) at every sale - and removed by the seller at every resale - IOW it is “neutral” to the middle man. Except of course if he raises the price in between, which is why it us called a value added tax, the idea being that every middle man “adds” some value to the product ...

So, if a dairy farmer sold milk for $1.00/gallon and need to charge a VAT of 10%, the purchaser must pay $1.10. If the purchaser resells the milk for $1.00/gallon, the purchaser (you, the final consumer) must pay $1.10. The reseller offsets the $.10 paid with the $.10 received and pays “nothing”. The dairy farmer can offset other VAT paid for grain, equipment, etc against that which he received.

Don't get me wrong - VAT is an evil tax as it supposes that every link in the chain somehow “adds” value to the product (I have paid VAT on a CD with pdf documents that I could have downloaded from the Internet - simply for the value “added” by the postal workers who transported it) - but the arguments the author makes are incorrect - the price does NOT change due to embedded VAT taxes as they are offset ..

[rolling_stone]

...Shouldn’t be too hard to see how much Mr. Cain’s new tax costs me then. I’m really looking forward to paying an extra $5,850.00 on that brand new diesel dually pickup I need that I’ve been holding off buying for the last four years....

So with a reduced income tax and no SS and medicare taxes, maybe you will finally be able to afford it. What difference does it make if you pay 9+9+9=27 % or 6.2 +1.45 + 25%=32.65% ?
Will the price drop if the manufactures costs go down?

[Cyber Liberty]

This as good and simple an explanation as I’ve heard. It’s a clear demonstration that the VAT tax is a compounded tax (a tax on a tax), not simply a new tax. IOW, the “miracle of compound interest” in reverse. Plus, the tax is hidden from view so the taxpayers don’t revolt.

Good article, thanks.

[rolling_stone]

Does the FairTax burden the retail industry?

All businesses are tax collectors today. They withhold income and payroll taxes from their employees. Moreover, the vast majority of retail businesses operating in states with a sales tax (45 states currently use a sales tax) are already sales tax collectors. Under the FairTax, retailers are paid a fee equal to one-quarter of one percent of federal sales tax they collect and remit. In addition, of course, retailers no longer bear the cost of complying with the income tax, including the uniform capitalization requirements, the various depreciation schemes, and the various employee benefit and pension rules. Finally, the economic growth resulting from the aggregate, beneficial effects of dramatically lower income tax compliance costs and no payroll or income taxes, customers having substantially more money — the greatest influence on retail sales — and a reasonable fee for collecting the FairTax, all ensure that retailers do quite well.

http://www.fairtax.org/site/PageServer?pagename=about_faq_answers#24

[Marie]

9% INCOME TAX.

The 9% corporate tax on everything that you do. (Utility bill, buying anything, etc) Do you think this is high?

This would give us the LOWEST corporate tax in the free world.

Not so high now, is it?

9% SALES tax on only new items purchased.

Realistically, how many new items do you buy every month? I would say that less than 25% of our income is spent on new items - the bulk of that is food.

You pay 9% income tax and that is it if you save or invest your money.

So, no. It's not 9+9+9=27%

Not even close.

You asked how much of our retail price is the result of hidden taxes.

fairtax.org estimates that 22% of the retail price of an item is hidden taxes.

[txroadkill]

This “new tax” attack line is a total lie. There is no new tax, there is simply a replacement for existing taxes

For me, yes, for my employees, it's new taxes that they didn't have to pay before because they have enough deductions not to pay Federal Income Taxes. So if 999 passes their pay drops 9% and everything they have to buy goes up 9%. Now, I have to pay my employees more to offset the 9% loss or they go to someone who will pay them more.

I understand that Cain says that prices will fall because everyone in between production and retail will pay less taxes, but I don't believe it will, people are hurting so bad that they will keep those few rate drops as profit waiting for the economy to improve and then consider a price drop. But because everyone is doing it the economy will never improve.

The idea has merit, I like the fact that it will kill all the regulatory taxes, but how about this, JUST GIT RID OF THE DAMN TAXES.

I am paying regulatory taxes to my electric company so the Rats can give it to Solar companies that produce nothing. That's what we should be screaming about, not changing the way we give money to Solar Companies that produce nothing.Stop spending my money on BS, stop taxing me more for more BS, Get rid of all the BS we've been paying for since Reagan left office and forgot to take the credit card with him and leave me the hell alone.

[I am Richard Brandon]

No none should think that VAT simplifies anything. The thinking processes of VAT inspectors is every bit as convoluted (they make and interpret the rules); as greedy (they have the exact same attitude as the IRS); and as oppressive as any tax gathering group in history.

The politicians can still 'game' the system - does VAT apply to food (is soda food?); shall we exempt children's clothing (Oh! to be a little person with no tax on small clothing sizes); shall we tax 'services' (what is a service?); and the example already mentioned - does transportation by UPS add 'taxable value'?

Plenty of ways to reward supporters here. Politicians do not change their spots and corruption rules!

[rolling_stone]

I agree

[behzinlea]

The Herman Cain 9-9-9 plan implements a retail sales tax. In no way, shape, or form does it implement a VAT.

I get it!

In one, the federal government inserts itself into every retail transaction I enter into and extorts money from me to redistribute to its favored interest groups. Whereas in the other, the federal government inserts itself into every retail transaction I enter into and extorts money from me to redistribute to its favored interest groups.

You're right. They're completely different. In no way, shape, or form does one look like the other.

[E. Pluribus Unum]

There is no new tax, there is simply a replacement for existing taxes.

Repeal them first and we can talk.

You will never get a tax repealed.

We still have a telephone tax that was passed to fund the Spanish-American war.

[MNJohnnie]

VAT, would be if VAT

Those talking heads who bring up VAT in regards to 9-9-9 are being intellectually dishonest

A VAT taxes at every level of production and hides the cost of the tax inside the cost the consumer pays for the good. 9-9-9 taxes only at the final point of sale and as an add on is clear to the consumer as a tax instead of hidden in the cost of the good.

[MNJohnnie]

VAT, would be if VAT

Those talking heads who bring up VAT in regards to 9-9-9 are being intellectually dishonest

A VAT taxes at every level of production and hides the cost of the tax inside the cost the consumer pays for the good. 9-9-9 taxes only at the final point of sale and as an add on is clear to the consumer as a tax instead of hidden in the cost of the good.

[Tublecane]

“A VAT is a hidden tax.”

Sales taxes are hidden, too, just less so. We all know from experience on the state level that it’s darn near impossible to keep in mind how much is going toward the store and how much toward the government in the checkout line. Our natural inclination is to blame the store, even when we know better. Government plays off that.

You should say “A VAT is a more hidden tax.”

[Tublecane]

“So you will just get an additional tax. End of story.”

That’s most certainly not the end of the story. Naturally Cain won’t sell it this way, but one of the big benefits of an additional tax is that it’ll be regressive and fall on the shoulders of people who currently have no income tax liability. Then it wouldn’t be just Fat Cats revolting against taxes. It’d put a dent in the tired “for the rich” counterargument.

[BfloGuy]

So now I have to raise my employees' pay because they don't see the big picture

Wow. I want to work for you. Act dumb and get a raise! Really, though, tell me you're kidding. No successful business-owner raises wages because employees' taxes go up. That is, of course, unless he's underpaying them now.

[Tublecane]

“the price does NOT change due to embedded VAT taxes as they are offset”

Offset by what?

[Pontiac]

All businesses are tax collectors today. They withhold income and payroll taxes from their employees. Moreover, the vast majority of retail businesses operating in states with a sales tax (45 states currently use a sales tax) are already sales tax collectors.

Yes I am aware of these facts and I consider all of them bad ideas.

Each individual should be responsible for paying his own taxes. The first rule of fighting tyranny is to be aware of its existence. The current tax load on Americans is a tyranny that most Americans are unaware of because they do not consciously pay those taxes.

Simply paying the merchant to be a tax collector does not make it ok. The fact that he already collects taxes for his own state does not make it right. Whether he is paid for his time or not does not change the fact that it takes part of the time he could better spend on other things.

Certainly the tax codes of the Federal and State governments need to be simplified down to single pages. In the corporate tax area I believe it should be simplified to no pages.

But first and foremost I believe that unless the 16th amendment is repealed I do not want the Federal government getting access to another tax stream. After the 9-9-9 law is signed by President Cain what is to stop a latter congress and later president from enacting a 21-21-21 tax? Answer: Nothing.

Don’t get me wrong I like Cain much better than Romney or Perry but the 9-9-9 plan does not appeal to me for many reasons. If we are going to have major tax reform let’s go for the gold ring; let’s have a flat tax that is easy to understand and is totally out in the open.

Everyone will understand exactly what is owed and what they are paying. Everyone will have “skin” in the game, no one is exempt down to the lowest wage earner. There will no avoiding taxes because there are no loop holes. And best of all everyone will be against tax increases because they will know exactly what it is going to cost them.

[Christian Engineer Mass]

But they WON’T stop the income tax.

[The_Reader_David]

Well, if they implement Cain’s plan they have to repeal taxes in doing so: the Social Security and Medicare payroll taxes and the estate tax all get repealed. Actually, the way Cain is selling it, that the only Federal taxes will be the 9% each individual income, corporate income and retail sales taxes, they’d have to repeal the Federal excise tax on gasoline and over-the-road diesel (and any other excise taxes I’m not familiar with) if they really implement what he’s telling us his plan is.