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News-Sentinel.com Your Town. Your Voice.
Opening Arguments

VAT of oil

Good lord, am I going to have to stop making fun of France?

French President Nicolas Sarkozy on Tuesday called for a cut in European oil taxes to help consumers as fishermen and truck drivers across the continent staged protests against soaring prices.

[. . .]

"I want to ask the question to our European partners: if oil continues to increase, should we not suspend the VAT taxation on the price of oil?" Sarkozy said in a radio interview. 


[. . .]

Meanwhile, French Prime Minister Francois Fillon said the country must boost its nuclear power to address the problem, adding that "we are dealing with a long-term increase of the price of oil."

Cutting a tax AND boosting nuclear power? What a difference electing somebody sensible can make. The VAT -- or value-added tax -- is, by the way, a French invention, at least as good a reason to suspect the French as their reverence for Jerry Lewis. Unlike the sales tax, which merely collects the government's poundgram of flesh at the final point of sale, the VAT is assessed at every point along the way from raw material to finished product. It's never gotten beyond the talking stage here but --  mon dieu! -- don't let your attention stray. 


Harl Delos
Thu, 05/29/2008 - 2:02pm

If a manufacturer takes $3 of materials, and turns it into $10 worth of product, he only pays VAT on the $7 of value that he added. That's why it's called a "value added" tax.

If a retailer buys 144 pencils at 6c each, and sell 140 of them at 10c each, only those 140 are taxed. The other 4 are subject to use tax if the merchant uses them himself, but odds are good he won't, and if they're shoplifted, they aren't taxed at all.

Under VAT, the merchant would reimburse the wholesaler for the VAT on the 6c purchase price for all 144 pencils, and would pay VAT on the 4c markup for the 140 that he sells.

That makes it a sales tax without loopholes.

There's no real difference in fairness whether we tax income or outgo, although VAT is far more fair than a sales tax, because wage slaves can rarely avoid the sales tax, while management often swaps "I can get it for you wholesale" deals with each other, allowing them to cheat on their taxes.

The big difference, though, comes in international trade.

When GM ships a Hummer to a German car dealer, the wholesale price includes corporate income taxes GM has paid, plus personal income taxes their employees has paid. The folks in Germany have to pay a VAT on the entire purchase price of the Hummer as well.

When VW ships a bug to a US dealer, the VAT is refunded when the car is exported, and the only income tax involved is on the markup on the car: corporate tax on the dealership and personal income tax on their employees.

Thus, imports from VAT nations have an unfair tax advantage, and exports to VAT nations have an unfair tax disadvantage.

And we have only ourselves to blame. The VAT is the flat tax we ought to be adopting, not that silly FAIR thing that Mike Huckabee has been promoting.

Thu, 05/29/2008 - 9:23pm

According to the Association of Chartered Accountants:

European VAT is in a mess for two main reasons: its vulnerability to fraud and its complexity. Fraud, evasion and avoidance cost at least one in every 10 euros of the tax collected

Harl Delos
Thu, 05/29/2008 - 11:34pm

The IRS says "misreported income" is only 1.8% of matchable income, but is 22.6% of nonmatchable income. The lion's share of income tax is paid by people with incomes over $200,000/year, and the IRS says their income is 46% nonmatchable.

That gives us an evasion rate of a little over 10% - roughly the same as you quote for the VAT.

Kind of an interesting document I found that information in.
I had no idea our individual income tax was so "leaky" at the federal level. It's definitely higher at the state level, especially in Ohio. Why? Because a joint return saves you tax at the federal level, costs you tax at the state level.

Most first-world countries need to raise about 20% of GDP in taxes. Any black market activity is, by definition, out of control, but as you point out, VAT is normally self-policing.

Most states have exemptions built into their sales tax systems. Groceries (but not water) and newspapers (but not magazines) are exempt in most states. Pennsylvania exempts garments to match New Jersey, to protect Philly merchants, and New Jersey does to steal sales from New York City's garment district.

When one can cheat on your taxes by buying across a nearby state line, many people do. Ohio residents living near Fort Wayne buy their liquor in Indiana. People who live in Chicago drive to Indiana to buy cigarettes. But a national VAT wouldn't be nearly as easy to evade.

But if you lower taxes on one thing, you have to make it up by raising it on something else. I'm in favor of a uniform tax on everything, to eliminate opportunities to chisel. (One of the big accounting firms got caught responding to the depreciation changes in the Reagan administration by calling doors "movable office partitions" - because cubicle components could be written off faster than leasehold improvements. Be glad you weren't one of THEIR customers.)

No tax is going to be perfect, but I think VAT is a significant improvement over what we currently have. Politicians talk about flat taxes to get elected, but vote against them once in office, because enacting and protecting loopholes is an easy way to get money from special interest groups.