I hate the CPSIA! It's a huge imposition on my small business. I make handmade cloth diapers and not on a large scale either. The new labeling requirements were difficult enough to figure out (I've discovered most brands aren't meeting the requirements at this time), but they still want another labeling to track all batches in case there is a safety recall in the future. First, diapers are small and there are only so many places a tag can go. Second, what sort of issue would prompt a recall on cloth diapers? They are fabric and velcro. On top of that, the regulators have yet to decide whether or not these requirements actually apply to diapers or not but want the standards to be followed now anyway. The whole law is stupid since all the lead problems with the toys were the result of ignoring current regulations and testing, so how is a stricter set of requirements likely to be ignored going to help?

Government regulators never have to estimate the cost of a proposed regulation v. the benefit. Under our nanny state, the government is here to help you and protect you and they will do so NO MATTER WHAT IT TAKES. They are no longer here to serve you. You are now here to serve them.

Here is what I think.

Nanny State {spit}
Endless rules and regulations covering every aspect of our lives because we need some regulation to tell us what to do and what not to do for every decision. {spit}
Government employees whose numbers keep increasing while their value keeps decreasing. {spit}

More Tea Parties? Heck yes!

A lot of the arguments about how bad a VAT would be merely illustrate how easy it is to wage a scare campaign against a proposed reform, whereas once such a policy is actually implemented people soon learn to accept it.

The VAT is a tax that works reasonably well in nearly every developed economy except the United States. But apparently it would be disastrous if the US implemented it.

Australia introduced a VAT (known locally as GST) in 2000. Prior to its introduction there was a massive scare campaign about how disastrous it was going to be, an administrative nightmare, would wreck the economy, destroy small business etc. etc. The sky would fall in. Many people were convinced that life would never be the same after its introduction.

Well, what do you know? The GST has proven to be an efficient and widely accepted tax. Few people seriously suggest doing away with it. And Australia's economy during the last decade has been among the most successful of the developed world.

Why should we pay more taxes for outrageous government spending? Why not cut the spending and the idiots who propose it?

Here in California, my favorite example is the idiots who voted in a high speed train (that isn't actually able to run high-speec) and never mind that California is so weighted down with debt it's about to break off and fall into the ocean. To name just one example.

Another: Bernard Parks, the former chief of police of Los Angeles, makes a $22K per month pension -- on top of his $164K salary as a city councilman. How is this sustainable?

Amy, I agree that spending cuts have to play a large role in reducing budget deficits, not just tax increases.

The problem is that so long as much of the population continues to demand more government spending, there is a need for the taxes to pay for it.

But even if you reduce government spending heavily, there is still the issue of tax efficiency. That is, you still have to raise the necessary amount of revenue as efficiently as possible. On that score, a VAT is a more efficient tax than most taxes, particularly income tax. Because a VAT is largely a flat consumption tax on the economy it doesn't impose many disincentives to work, investment, savings etc. You can raise revenue at a lower cost to the economy overall by bringing in a VAT and reducing other taxes.

The one advantage America has over European countries in dealing with record budget deficits and government debt is that America still has more options to increase revenues. Such as bringing in a VAT.

The Europeans have already exhausted all their revenue options and taxed their citizens to the hilt, so now they have nowhere to go.

Australia introduced a VAT (known locally as GST) in 2000. Prior to its introduction there was a massive scare campaign about how disastrous it was going to be, an administrative nightmare, would wreck the economy, destroy small business etc. etc. The sky would fall in. Many people were convinced that life would never be the same after its introduction.

That will be a great thing if the day they implement the VAT they dump every single employment tax at federal, city, state, and school. If that happens, I'm more than happy to support it. If they don't, then I'm go to fight it until I'm a bleeding wreck.

And also property taxes and car registration taxes as well.

What Nick said. VAT is a fine system, used by far more countries than use sales tax.

The biggest problem with the sales tax system in the USA is the fact that every state, county and city government wants a piece of the action. The result is a huge morass of continuously changing tax rates.

VAT would indeed be a bureaucratic disaster - if implemented as a direct replacement of sales tax, leaving this mess in place. Changing tax systems would offer a chance to clean up the mess, and introduce a single, state-wide tax rate. Cities and counties should fund themselves through property- and use-taxes, not through sales tax or VAT. Of course, one could just clean up the sales-tax mess without changing to VAT.

VAT has one advantage over sales tax, and one disadvantage.

The advantage: fairness. At present in the USA, businesses selling to consumers bear a all of the burden of the tax system. Selling B2B incurs no tax at all. The distinction between consumer and business is an arbitrary one - how many people have (or pretend to have) their little home business? The advantage of VAT over sales tax is that it evens the playing field by sharing the tax burden across all businesses.

The disadvantage: the tax is hidden from the consumer. When you buy something for $100 and have to pay $8 additional sales tax, you cannot help but be aware of the tax rate. With VAT the tax is built into the price of the product, not paid in addition. This hides it from sight and makes it easier for the government to increase the tax rate.

Bradley, I agree with most of what you say except the final paragraph. In reality the VAT is a highly transparent tax because it ultimately falls on the consumer at the final point of sale and is a flat rate.

In Australia the amount of GST is listed on every receipt. And given the rate is 10% on everything, with a few exemptions, it is not hard to work out how much you are paying. In Europe it is much the same. TVA is listed on all receipts.

In reality, other taxes tend to be less transparent because their costs are often buried in different stages of the production process and the consumer has little idea of how much they are really costing them at the end point. Even with sales taxes in the US, there is often some 'cascading' effect where goods are taxed more than once and yet consumers have no idea of the extent that this is really costing them.

Indeed, the transparency of a VAT is one of its biggest selling points.

If there's a VAT, it's not going to replace other taxes, but add to them, Nick S.

The argument that is often made in favor of the US system of retail sales tax over a VAT is that it is simpler and more efficient to only levy a tax at the final point of sale, rather than having a system of taxes and credits across all stages of the production process.

In reality though, as Bradley points out, it is actually more complex and unfair to attempt to work out who is a legitimate business and who is not for the purposes of sales tax exemptions. A VAT eliminates that.

The other advantage of a VAT is that it helps facilitate trade across different states and countries. If goods and services are bought and sold across different jurisdictions, it is relatively easy to simply levy VAT and simply offset VAT paid elsewhere.

Amy, you may be right. But when you have a budget deficit of 10 or 12% of GDP it essentially boils down to a choice between either bringing in a VAT or declaring bankruptcy and having the IMF come in and run the show from then on.

A lot of small-government conservatives and libertarians have long run the 'starving Leviathan' type argument against a VAT. That is, if you restrict governments to relatively inefficient taxes you can limit the growth of government more effectively. The problem is that this approach clearly hasn't worked. All it has done is ensured that big government is funded through larger budget deficits instead. Perhaps the only way to starve Leviathan is to shut down the financial markets or have a constitutional balanced budget clause.

And the VAT is not primarily responsible for Europe's high levels of government spending. Many other countries have a VAT (like Japan) and still have relatively low levels of government spending. And most European countries had relatively big government before they introduced VAT.

I don't really care how "well" other countries are doing with the VAT in place. The laws of supply and demand, and other laws of economics, will still apply.

FACT: The VAT will not replace any other tax. To wish that this would happen is a pipe dream. All other taxes, federal, state, and local, will remain the same. Thus, the net result of the VAT is an additional transfer of whatever the percentage is, from consumers to the government.

FACT: This will act as an instantaneous price increase by the percentage of the tax. Consumers will react as they always do to price increases, by decreasing their consumption (demand).

FACT: Decreasing customer demand leads to decreased business activity and decreased employment. Less people employed leads to even less spending and business activity. The cycle continues until the country reaches a new, higher equilibrium unemployment rate.

FACT: Thus: countries with a VAT have higher unemployment rates and larger shares of GDP controlled by government bureaucrats, than if they didn't have a VAT.

FACT: Imposition of a VAT will not decrease politicians' appetites for spending. It hasn't in Europe, and the imposition of new taxes has never in America, either. VAT countries have as many or more fiscal problems as we have, and they've had the VAT for a long time. With more money available to the State, the only things that will grow are government employment, crony capitalism, and the number of us utterly dependent on the State for our existence.

As with every major program this administration has pushed through or proposed, the VAT is a private-sector jobs killer. If people think it's so great, they should understand what its ultimate effects are.

The last thing that anyone who cares about this country's future should want to do is give politicians MORE money to spend. IOW, give more to the same people who already have governments at all levels teetering on the brink of insolvency. As someone once implied, this is the very definition of "idiocy".

The problem NickS, is that you see a lrger government as a good thing. WHY is the budget deficit so high, and going up? Could it be that it's because of an astonishing amount of spending? When I am having trouble making ends meet, I don't go out and buy a big screen TV, just because it will make me feel better. Most governements do. The efficientcy of the shopping spree in the US governemnt has had very little effect on helping consumers, while it has had a good effect on govt. employees, reletively speaking. That is because it has enlarged the govt. The US doesn't NEED a VAT, we need to spend correctly in government.

For your edification, I bring a link, that has a graph on how much change there has been in European VAT, and oddly enough, how income taxes are also still high:
from TaxProf

AND? There are always those that argue about VAT and sales taxes being disproportionally paid by the poor, how d'ya think it's going to go over with them?

I'm in favor IF AND ONLY IF, they repeal income taxes [16th Ammendment] But as we have seen, NO other country with the VAT has ever done that. It's an added tax alright, but not Value.

Nick S said:

> Many other countries have a VAT (like Japan) and
> still have relatively low levels of government
> spending.

On what planet? Japan has a debt of 227% of GDP. It has the highest debt-to-GDP level of any industrialized country, following decades of massive government spending.

Since the various stages of production can occur in several states and/or countries, the VAT is a federal tax.

That means either states will continue levying their sales and income taxes or will become almost wholly dependent upon the federal government for handouts from the VAT pool. It concentrates more tax power in the hands of the federal government.

So Snoopy, where did you pull that figure? The latest est. I've seen was 192 for 2009, although, I suppose it depends on how the apples are sliced. In any case all those VAT countries with the exception of Australia, NickS, have a much worse ratio than the US... But what does it mean, really?

See Here

@SwissArmyD - the figure is from the IMF. See, for instance, here:
http://www.cbc.ca/money/taxseason/story/2010/02/17/f-debt-gdp-budget.html

All this talk about the VAT has excluded one option: the government should stop spending so much damn money.

"That will be a great thing if the day they implement the VAT they dump every single employment tax at federal, city, state, and school."
--------------------------------------------------
Uuuuhh, unfortunately the actual plan is to ADD the VAT to all of the other taxes we have, not replace them.

Behind the scenes, there is a more subtle plan in place to reduce the size of the middle class so there will be far less resistance when the people who really run this country go public with the official merge of the USA and Mexico and call this new country the North American Union.

The elites have to get rid of most of the middle class to accomplish this since this class of people have both the means and disposition to resist the coming NAU. Most of the rich won't care and the poor cannot do anything about it since most of them live off of the government tit (what a coincidence). Oh, one more thing, when the elites do implement the North American Union against your will, the US Bill of Rights and Constitution will not apply.

It will be a different country.

They will be replaced with a soviet style constitution. (ie. no free speech, want to own a gun? FEMA camp for you, no trial by jury, habeas corpus, etc).

Instead of acronym GULAG, you will be intimately familiar with the acronym FEMA. At least that's what I hear from people I know who still work for certain fedgov agencies which I will not name here.

Nick S, cpabroker, SwissArmyD - you're all right and at the same time wrong.

The introduction of a VAT in Australia was extremely successful. But it was introduced by a conservative government led by John Howard and he had the guts to go to an election with it as policy to establish public support. It replaced a hopelessly complicated system of sales taxes (e.g. from memory, toothbrushes were taxed but toothpaste wasn't, engagement rings were taxed but wedding rings weren't), and there was fairly wide recognition that the existing system was untenable. By long standing precedent the states here don't levy income tax, rather the Feds collect tax and distribute it to partially fund the states. This leaves the states with bad to worse options for raising additional funds - payroll taxes, financial transaction taxes, stamp duty on property sales. The point behind the GST was both to get rid of the complicated and inefficient sales taxes and to provide a secure and broad based funding stream for the states. In return income tax was substantially reduced and the states agreed to eliminate or lower their txes which dragged on economic activity (I should point out they did some of this but partly reneged on the agreement - depending on who you talk to). The rules require retailers to show the VAT charged on receipts and invoices so it is transparent to the end customer, there were some teething problems but generally it has proved fairly easy to comply with and administer. And because of the reduction in other taxes it was basically revenue neutral for the government. I think what Nick S is trying to say is that it doesn't have to be a disaster or a huge tax grab. I don't think he was advocating larger government either.

But I understand that for those of you in the US that it's highly unlikely you would have the same experience. Firstly, getting the same sort of agreement to remove sales taxes etc with roughly ten times as many states is going to be, to put it mildly, impossible. And we've always had a more centralised federal government - our population is only 22 million anyway so the rationale for state governments is shaky at best - they are effectively local service providers for the feds. Most importantly, we could do it as a revenue neutral exercise because our budget was already in surplus and we were paying down government debt (Australia had, until recently, effectively no government debt). I agree with you that Obama and the Democrats would be using it to raise more revenue to fund a bloated government.

A note on compliance costs - the Australian Tax Office, after a few iterations and feedback from people who didn't understand the original forms, ended up with a single page, double sided form where you fill in "outgoings and tax paid x, incoming revenue and tax collected y, y minus x is what I owe you". You submit it every quarter and it takes about half an hour for a small business and a couple of easy reports from your bookkeeping software. If you don't have that information to hand you're not really running a business. But again I don't have a lot of confidence in the IRS to design a simple system.

The VAT is a tax that works reasonably well in nearly every developed economy except the United States. But apparently it would be disastrous if the US implemented it.

Yeah, actually it would be pretty damn disastrous to have yet another tax added to what we are already paying, which is of course what will happen.

Since the various stages of production can occur in several states and/or countries, the VAT is a federal tax.

That means either states will continue levying their sales and income taxes or will become almost wholly dependent upon the federal government for handouts from the VAT pool. It concentrates more tax power in the hands of the federal government.

Conan, you are absolutely correct. The US situation is peculiar because of the relatively high independence of the states (although it remains to be seen how long California can afford to be independent!). A VAT can only work as a federal tax so it necessarily centralises taxation power. Paradoxically, in Australia it actually increased the independence of the states, but that's because the feds were already providing the funding, every year they have a meeting where they work out who gets what - this gave them an earmarked, guaranteed funding stream in place of the essentially arbitrary distribution of income tax collections they had before. It is a sensible way to fund government, but as I said, I wouldn't trust the current mob to do it right either.

LTW has it right. The arguments about the administrative and compliance costs of a VAT are a good example of people who simply like having something to whinge about.

All that is required is that a business keeps a record of how much VAT has been levied on its sales, and how much VAT has been paid on its input costs, and the difference is forwarded to the tax office every quarter.

If you are not capable of doing that, you are not capable of running a business. Period.

"On what planet? Japan has a debt of 227% of GDP. It has the highest debt-to-GDP level of any industrialized country, following decades of massive government spending." - Snoopy

Snoopy, in Japan public spending and taxes as a share of GDP are relatively low compared to most developed nations. This is not a matter of serious dispute. Anyone familiar with economics would know this.

Japan's high level of government debt is largely a result of the government trying to stimulate the economy in order to offset the household sector's high levels of savings and low levels of spending. In Japan most government debt is still funded by private citizens buying bonds rather than through international borrowing.

This is usually referred to as the principle of Ricardian equivalence. That is, there tends to be an inverse relationship between the public and private sector's level of borrowing or saving.

Uuuuhh, unfortunately the actual plan is to ADD the VAT to all of the other taxes we have, not replace them.

No fucking shit!!!!

I'm at the point that I want no more taxes. I am already paying over 25% (and anyone middle income is), no matter what the IRS says. Did you know that your "medicare income tax" which I'll probably never see is not considered an income tax?

"The arguments about the administrative and compliance costs of a VAT are a good example of people who simply like having something to whinge about." NickS

Funnily enough Nick, I thought LTW was talking about that in terms of Australia, and nowhere else. Since Australia's set-up is singular to itself, I think comparing the US possibilities to it is stretching to broken.

Why not pick some place like Germany and explain to me how it works there, and how that would be doable in the US? And how it would benefit the US?

Also? Tell me why 2 lost decades in Japan is a good outcome of VAT there.

SwissArmyD, I was trying to explain the circumstances under which we became one of the few places to have actually done it right. Not to say we were special or singular. I was just supporting Nick in the opinion that a VAT can be a sensible tax if (and I'll grant it's a big if) you have a sensible government, reasonable trade-off with other taxes, a public service that listens and fixes compliance problems during the implementation, a low government debt to cover the changeover - oh hell, I'm disproving my own point.

"The arguments about the administrative and compliance costs of a VAT are a good example of people who simply like having something to whinge about." NickS
Funnily enough Nick, I thought LTW was talking about that in terms of Australia, and nowhere else.

No, what I was saying is that technically a VAT should be easy to comply with - much easier than complying with myriad sales taxes. There is no reason the IRS couldn't do something similar. They could always copy our forms if they like, we'll probably be happy with one more F-35 in exchange.

The IRS likes it complicated, because it makes compliance almost impossible, which means that everyone must live in fear of the IRS.

We probably have the most complex set of laws in the world, such that pretty much every American is a criminal, but doesn't realize it. Again, the powers that be like this, because it makes it possible to fuck with people at any time. Look hard enough, and you'll find something that they did wrong.

And they'll do the same thing with a VAT. Make it so complex that compliance will be all but impossible, thereby increasing income from interest and penalties, and increasing the opportunities for graft (always a hit with bureaucrats).

What needs to be done is the 16th amendment repealed, the IRS building razed, the Department of the Treasury gutted, and the bulk of the tax code repealed.

Then we can start over and perhaps be sensible about it.

And I could sit in a corner and shit nickels.

I daresay that for most Americans now, any new tax, for any reason whatsoever, is completely and utterly off the table, no matter what. So the whole discussion is moot. And Ltw pointed out something: a centralization of tax collection under a VAT would be the end of state governments in the U.S. The federal government already has a long history of coercing states into giving up Tenth Amendment rights by threatening to withhold federal transfer payments. Under a VAT, the state governments would cease to exist. They would become federal administration districts with federally appointed governors and no legislatures of their own.

Thanks for the clarification Ltw... But the issues certainly occured to you... Think about the vast impediment to all this... Brian mentioned complexity. The name I know it by is entrenched technocrats. Their jobs depend on the complexity we have. So, they would love to add to it, but not roll things back. The point Cousin Dave makes about state governments and their relative strength, is far more important as an impediment. The tradition of States' rights shouldn't be underestimated.

Call me crazy, but all in all, the answer seems to be spending less money by the fed government. But that isn't how a technocrat builds an empire...

Mind you, there's nothing to stop individual states introducing VATs to replace their current sales and/or income taxes. Thinking about it some more this is probably a more effective way for them to raise revenue and doesn't contribute to the federal budget. And it should be possible at that level for them to minimise compliance costs with a simple system. I did agree I have no confidence in the IRS being able to implement a system as simple as ours (many other countries have failed in that also). And if several states start doing it then cooperative agreements to cover cross border transfers of input credits would be possible too. This might provide a more efficient income stream without involving the feds.