“If it replaces the business tax of 34 % with a 10 % tax and it is applied to the full price of any import, does it not effectively do exactly what Trump was with regards to making US business more competitive with Tariffs?”
Vats do not replace other taxes.
The vat is added to the product at every stage and is based on the increase in value between raw materials and finished products. You do not get to deduct expense for the increased value. My example above may have been confusing let me try again.
This time with numbers
Pretend I cut down the huge mango tree in my back yard and sell the truck and large branches to Bob the saw mill owner for $100 plus the VAT making the total cost to Bob $116.00
Bob processes the trunk and large branches into lumber and sells the lumber to Sam the custom furniture maker for $1000
$1000.00 - 116.00 = 884.00 x 0.16 = 25.44.
So Sam pays $1025.44 for the lumber.
Sam turns the lumber into a matching dinning table, with 8 chairs, side board and china cabinet which he sells to a Phil who owns a furniture store for $5000.00.
$5000.00 - 1025.44 = 3974.56 x .16 = 635.93
So Phil pays s total of $5635.93 for the lumber.
Phil places the custom furniture in his store priced at $15,500.00
$15,500 - 5635 = $9865.00 X .16 = $ 1578.40.00
Phil sells the furniture to Suzy who pays $15,000 + 1578.40 = $1707.40
Add all that tax together equals
$1578.40 + $635.93 + $25.24 + $16.00 = $2255.57 in tax on an original purchase of $100.00
At no point does the VAT tax replace income for the business or sales taxes.
I lived in the UK with a 20% VAT and they still have both
Thanks for the math:))
>>Vats do not replace other taxes.
Cruz’ does. The corporate tax (35%), alternative minimum tax and payroll taxes are eliminated. The 16% business tax replaces them.
From the tax foundation
http://taxfoundation.org/article/details-and-analysis-senator-ted-cruz-s-tax-plan#_ftnref3
Business Tax Changes
•Eliminates the corporate income tax.
•Provides a temporary tax holiday at a 10 percent rate (instead of a full 35 percent rate) on any deferred foreign profits that are repatriated. [possibly bringing back corporate inversions - but only during the ‘holiday’ period - so companies would have to decide to return soon or pay the full rate.]
Other Changes
•Enacts a broad-based, 16 percent “Business Transfer Tax” or value-added tax. This tax is levied on all business profits, less capital investment. This would include the payroll of business, government, and non-profit institutions, as well as net imports. The tax would exempt from taxation the purchase of health insurance. A business transfer tax is also often known as a subtraction-method value-added tax. While its base is identical in economic terms to that of the credit-invoice VAT seen in many OECD countries, it is calculated from corporate accounts, not on individual transactions. [2]
•Eliminates the estate tax.
Economic Impact
Senator Cruz’s tax reform would be a significant shift from the current tax code. Under this plan, the income tax would be greatly diminished in its importance compared to current law. Instead, the U.S. federal government would raise 71 percent of all revenue from the new broad-based value-added tax. The tax is a broad consumption tax that would include most of U.S. GDP, including both wages and profits.[3] Due to these changes, the taxation of investment would significantly decline, which would greatly increase incentives to save and invest.
According to our Taxes and Growth Model, the increased incentives to work and invest from this tax plan would increase the size of the economy by 13.9 percent over the long run. The plan would lead to 12.2 percent higher wages and a 43.9 percent larger capital stock. The larger economy would mainly result from a significant reduction in the service price of capital, due to the elimination of the corporate income tax and the significant reduction in the individual income tax. In addition, the reduction of marginal tax rates on individual income would increase incentives to work and result in 4.8 million full-time equivalent jobs.
Also see page 7:
http://www.taxpolicycenter.org/publications/analysis-ted-cruzs-tax-plan/full