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.

[Brookhaven]

"The 999 plan lays down the infrastructure for a VAT" is one of the most often heard criticisms of Cain's plan.

If you really understand the difference between the two, you'll realize that that simply isn't true. Only the retailer at the very end of the supply chain is part of the sales tax system. All the other businesses in the supply chain are outside of the system. Manufacturers, wholesales, and suppliers don't have the mechanism for collecting or paying any kind of sales tax. They don't report sales numbers to anybody. That's true under the current retail tax system run by the states, and it would be true under a federal retail tax system.

The truth is, the tax collection system that is closest to a VAT is the current income tax system, because every company along the supply chain is already a part of that system. The collection of a VAT would be piggy-backed on business's current quarterly income tax filing. That's how a VAT would be implemented, not via some new mechanism.

A retail sales tax doesn't do anything to lay down the framework for a VAT. The current income tax system is what would be used as the framework for a VAT if one was ever implemented in the USA.

[Perdogg]

Some Bimbo infobabe on CNBC doesn’t know, but I do!!!

[achilles2000]

Does everyone understand the difference? Of course not, and the MSM is encouraging confusion.

[Batman11]

Thanks for posting this thread! Vote for Cain, Kill the IRS!

[ken21]

bumo.

[upchuck]

Thank you for posting this. I have been fighting the 999 = VAT for some time.

The bunch of FReepers that think a national retail sales tax “lays the groundwork” for a VAT are incredibly ignorant.

Get educated!!

Use some common sense.

[Christian Engineer Mass]

That’s not the problem. The problem is THEY WILL NEVER STOP THE INCOME TAX.

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

[crz]

Now why in the hell would you want the truth get in the way of an out and out lie?

No, very few understand the truth as you have posted. And the ones who do not want to believe the truth are the ones who stand to lose by the elimination of the present system. Mostly shyster tax lawyers-like Bachmann, and CPAs, and those getting kickbacks off the backs of the tax payers of this nation.

[rolling_stone]

can you add and subract?

[Christian Engineer Mass]

I am so sick of you morons with your personal attacks.

What did you not understand in my post? What can I explain for you?

[MestaMachine]

This is why we need to send as many REAL conservatives to Congress a is humanly, maybe SUPERhumanly, possible.

[RainMan]

There is one difference, at least in Canada’s implementation of VAT, to what you describe. Each company DOES pay VAT on what they buy, and charge VAT on what they sell, but what they pay the government is the difference of the two.

In other words, if I pay $100 in taxes on raw materials, and I charge $250 in taxes on finished product, I pay $150 ($250-$100) to the government in taxes. Implementation of VAT therefore becomes the Accountant and Tax Collector full employment Act, because that is a lot of bookkeeping.

The other big question that comes in on a VAT, would be if VAT and state sales tax are both paid on purchase, or is one charged on the total of purchase and the other. In other words, lets say you had a 10% State Sales Tax, and a 10% VAT. If both were charged only on the purchase, you would have $20 ($10 each for state and federal) on a $100 purchase.

However, if one was positioned superior, say the federal, then you pay $21 in tax. The $100 purchase is taxed 10% ($10) at the state level, giving you $110, then THAT is taxed at the next 10% for your federal tax, which would be $11, for a total purchase of $121.

All this being said, I have heard nothing about Cain’s plan that would implement a VAT, but the final issue, about precedence, will certainly need to be clarified, because it would still apply to a sales tax.

[rolling_stone]

9 plus 9 plus 9 equals 27
what are you paying now in income tax and hidden business taxes?

[Echo4C]

I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.
I am so sick of you morons with your personal attacks.

This is what we call hypocrisy.

[ThomasThomas]

I would assume like in California, a highly taxed state that there is no sales tax on milk or most food bought a grocery store.

[.45 Long Colt]

This shyster tax-lawyer and CPA is behind 9-9-9 (hoping it ultimately leads to the Fair Tax). I can make a living some other way. I got into this business because I despise the tax system. I work hard to preserve my clients’ hard-earned money.

By the way, my partners also support Cain, so be careful painting with your broad brush.

[rolling_stone]

true, but hot food (prepared) is taxed

[ngat]

“If you really understand the difference between the two, you’ll realize that that simply isn’t true.”

So, are you saying the new 9% Federal sales tax will be printed out on your sales receipt at point of sale so you can account for how much Federal Sales Tax you paid all year long?

[rolling_stone]

It appears you have not read up on the Fair Tax.
I suggest you do so. We have years of debate on FR concerning it, which is the second phase of Cain’s 999.

[Brookhaven]

The other big question that comes in on a VAT, would be if VAT and state sales tax are both paid on purchase,...

Or, if income taxes and a sales tax are paid on the same purchase...

In other words, your argument doesn't make sense. A VAT and retail sales tax are no more tied together than a state income tax is tied to a state sales tax.

Michigan currently has a state income tax, a state VAT (known as the single business tax--SBT), and a state retail sales tax. They are in fact, three totally different tax systems. The existance of one doesn't preclude or encourage the existance of another.