Posted by Fred Lake

Understanding Value Added Tax: Will it Help the US Economy?

Understanding Value Added Tax: Will it Help the US Economy?

The tax system is something that concerns and unites every American irrespective of differences. Also, all Americans will gladly embrace any means to reduce their tax.

A Valued added tax, unlike income tax, is a consumption tax, like sales tax.  The idea of VAT is to tax the value that a business adds at every stage of production. VAT and sales tax differs majorly in the collection time. VAT collection happens at every step of the service or good production, while sales tax is applied to the final product sale. 

VAT exists in two common forms: the Credit invoice VAT and Subtraction Method VAT. The most common VAT method is the credit invoice VAT, which will be the focus of this article. 

With this approach to VAT, VAT payment is on everything bought while goods sold will bring in VAT. The firm will send the evidence of the invoice of the VAT amount to the supplier and the revenue agency for a property that verifies the authenticity of the VAT. After verification, the firm that paid the VAT will get a refund from the revenue agency. 

With everything equal, the firm will not pay the VAT as it is transferred to the final consumer, the same way sales tax does. The firm simply serves as a collection channel who sends the VAT to the revenue agency. 


Pros of VAT

Here are some pros that come from the implementation of VAT in America. 

Growth in the Economic: All business production states involve collecting VAT, which is directed to the government. With this, there is a streamlined and efficient collection system for the government, making the revenue collection approach better. 

Government has an affinity for VAT compared to income taxes because the revenue from VAT is higher. When you consider the fact that businesses get credits for the VAT they collect at every production stage, it encourages it. This brings more money to the economy, which encourages growth.


Border Adjustability 

 This is the process in which the government either excludes VAT from exports or sends the full VAT paid from exports. This is the approach used by most countries that levy VAT on imported goods. There are main pros:

  • Exports are put on the same pedestal as goods from various countries since the tax rate is the same no matter the origin and point of sale.

  • All domestically sold goods have an equal tax rate irrespective of the production point. 


Cons of VAT

Here are some points to counter the VAT’s strength:

High Tax Burden for Lower-Income Folks

The tax central idea is to make everyone pay the same tax amount when they buy goods. People against VAT believe that it will cause low-income earners to pay more than what the US current tax system does. 

VAT supporters agree that a way to navigate this is to get people of lower-income a refund or exemption from some necessary products, while products classified as luxury should be taxed. 


Supports Government’s Wasteful Spending 

VAT, when levied, can generate billions of dollars for the government. However, the government, in a bid to generate more, could increase the VAT rate. This is the practice in many parts of the world as they implement VAT and increase it over time.

If VAT is in place, Congress could suggest an increase anytime there is a need to raise money. With this, the government has enormous power, which is a concern for many. 


An Underground Economy will Arise.

VAT is applied at every production stage with reports on the different invoices. With this, there is a paper trail compared to the current tax system. There would be people that will find a way to outsmart the system even with the paper trail. 

This leads to the creation of what is called an underground economy. This is the norm in various countries with a VAT system. People and businesses will conduct a transaction without leaving a paper trail, making it easy to elude VAT. With this, regulation by the government will be a little challenging.


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Fred Lake
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