Value-added tax is a staple throughout Europe, the UK and Canada. While it's just business as usual for residents of the European Union, American consumers pay sales tax. In an alternate universe, this might have not been the case. In the 1970s, Congress considered adopting a value-added tax. As we know now, they didn't get very far, but champions of the practice still consider it the ticket to universal health care in the United States. Regardless, a 1979 study by the Tax Foundation clearly outlined the disadvantages of VAT stateside. Naysayers believe the tax would lead to higher inflation rates and excessive spending and would make businesses increasingly more complicated on the administrative side.
VAT Complicates Things
VAT is incurred by businesses at every single point during the chain of production, from the manufacturer to the retailer to the consumer. In America, the tax is typically paid only at the end of the line in the form of a sales tax. Overall, it's not actually that different from sales taxes for consumers, who end up paying the same either way. It's the manufacturers who would see a difference, and that's where things get complicated.
For example, if you're a baker selling a $3 loaf of bread, a 10-percent sales tax would make that product $3.30 for a consumer. If there's a VAT, the tax would be redistributed to everyone involved in making that single loaf. Say a farmer sells wheat for $1. The miller who buys the wheat sells flour for $2. The baker buys the flour and sells the loaf of bread for $3. With a 10-percent VAT, the farmer would instead sell the wheat for $1.10, the miller would sell the flour for $2.20 and the baker would sell the bread for $3.30. The consumer is paying the same price, but it's far more confusing for everyone else.
VAT Could Cost Significantly More
It's safe to say there's no one on the planet who wants to pay more taxes. Consider the controversy surrounding Donald Trump's recently enacted tax plan. This is one of the main arguments against VAT. VAT is typically suggested as an addition to our current tax system, not a replacement, which would substantially raise taxes for every American. Who wants to pay sales tax and a VAT? A similar tax system called a "flat tax" is what's typically pitched as a total replacement.
VAT Would Do Little to Increase State Revenue
The disadvantages of VAT don't have to be extreme. Sometimes, it just amounts to a colossal waste of time. In America, there is already sales tax, which falls into two categories: selective sales tax and general sales tax. Selective sales tax is placed on a certain commodity, such as alcohol or cigarettes, and general sales tax is placed on the sale of most other tangible goods. Only five states have no general sales tax.
In 2014, states collected $412 billion from sales tax, which accounted for around 35 percent of their general revenue. Most of this cash is put in a state fund that pays for things like Medicaid, education, public pensions, prisons, police and foster care. If the U.S. repealed its current tax system and replaced it with an equivalent VAT, these states would see little or no impact to the general fund that finances all these important programs. In other words, it would be a waste of government time.
Highest Earners Pay the Smallest Percentage
One of the main gripes liberals have with VAT is that it affects the poor and rich equally. Those with higher incomes don't have to pay more into the system than those who can barely afford a loaf of bread. The ethics of what's exactly fair is completely debatable, but when it comes down to it, a VAT makes the biggest impact on the lowest earners. Whether this is one of the advantages or disadvantages of VAT depends on where you fall on the socioeconomic scale.
VAT Offers No Incentive to Join the Global Economy
In the UK and European Union, international consumers can get refunds for any VAT they paid on gifts and merchandise during their trip. For example, if you're an American who purchased a pair of $120 shoes in London, you’d be able to fill out a document and receive a refund of $20 because VAT is 20 percent in the UK. Of course, many consumers don't want to bother with filling out the paperwork, but a fair share of large purchasers definitely do, and that's money the government loses.
In America's current tax system, sales tax cannot be refunded to foreign consumers, which gives states an incentive to promote tourism and export goods. Provided tariffs aren't in play, the U.S. generally benefits from joining the global economy with our current tax system.
Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.