negative brief - vat tax

7/23/2019 Negative Brief - VAT Tax

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Table of Contents

VAT has no benefits to it, and hurts the economy2The cause of the massive federal deficit is over-spending, not a lack of taxation2

If the VAT is added on top of the other federal taxes its comparative advantagesdisappear2hat VAT tax is2hat credit-invoice is!"#usinesses don$t pay tax, only consumers do"%o& VAT tax &orks!!"The difference bet&een VAT tax and sales tax!'hat subtraction VAT tax is!!'The difference bet&een VAT credit-invoice tax, and subtraction method tax is!!!()ubtraction method VAT &ould be a poor choice as an additional ne& tax along &ithtraditional income tax!(

hat the additional method VAT tax is!*The additional method tax has serious problems to it, and doesn$t have any of theadvantages other VAT tax does!*VAT is a hidden tax*VAT taxes services!!+VAT causes more state sales tax!VAT causes an underground economyA. Tax /raud!0Authorities &ill struggle to catch criminals for tax fraud1VAT consumes more of the lo&-income person$s money, than a high incomeperson1

VAT lo&ers investments, and lo&ers the value of the nations resources11VAT gives more po&er to the government and la&makers113nce VAT tax is put in place, it continues to increase114ountries in 5urope continue to raise the price of VAT tax12A. VAT &ould permanently slo& economic gro&th1'AT. Increased savings rate6 Turn. ecreased savings rate!!1(AT. VAT &ould increase investment6 7esponse. VAT &ould not effect savings, so there isno investment increase, it$s actually likely investment &ould decrease!1*AT. 5conomic gro&th6 Turn. Tax decreases economic gro&th!1*AT. 5conomic competitiveness6 7esponse. 4ongress &ould most likely not reduce taxesto lo&er the deficit, but even if they did, a future congress could al&ays raise it!1*AT. 8o&ered tax rates6 7esponse. 4ongress &ould most likely not reduce taxes to lo&erthe deficit, but even if they did, a future congress could al&ays raise it1+AT. VAT &ould lo&er the deficit6 7esponse. 4ongress &ould need to have fiscaldiscipline to stop spending in order for the deficit to lo&er!!1+3verspending has caused the deficits, not lack of revenue14redentials!!2

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VAT has no benefits to it, and hurts the economy

4urtis ubay 9is a )enior Analyst in Tax :olicy in the Thomas A! 7oe Institute for5conomic :olicy )tudies; ecember 21, 21 http.??&&&!heritage!org?research?reports?21?12?the-value-added-tax-is-&rong-for-the-united-states

The cause of the massive federal deficit is over-spending, not a lack of taxation


If a VAT is added on top of other federal taxes its comparative advantages disappear


What VAT tax is

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http://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-states


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What credit-invoice tax is


usinesses don!t pay the tax, only the customers do


"o# the VAT tax #orks

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The difference bet#een VAT tax and sales tax


A credit-invoice VAT is generally easier for revenue agencies to enforce than sales taxes

and therefore enables more efficient revenue collection! The method of revenuecollection makes it more efficient! A sales tax is collected only &hen the final user of theproduct makes a purchase! /or instance, customers buying a ne& pair of shoes or a ne&television pay the price of the item plus the sales tax, &hich is an additional percentage ofthe sales prices, at the point of purchase! %o&ever, businesses do not pay sales taxes onthe items they purchase so that the sales tax does not inside the cost of goodsand raise their prices surreptitiously!

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http://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-stateshttp://www.heritage.org/research/reports/2010/12/the-value-added-tax-is-wrong-for-the-united-states


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What subtraction VAT tax is

4urtis ubay 9is a )enior Analyst in Tax :olicy in the Thomas A! 7oe Institute for5conomic :olicy )tudies; ecember 21, 21 http.??&&&!heritage!org?research?reports?21?12?the-value-added-tax-is-

&rong-for-the-united-states

The difference bet#een VAT credit-invoice tax and VAT subtraction method tax


$ubtraction-method VAT #ould be a poor choice as an additional ne# tax along

#ith traditional income-tax

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What the addition-method VAT is


The additional method tax has serious problems to it, and doesn!t have any of the

advantages other VAT tax does



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the addition-method VAT &ould create a substantial drag on the economy, unlike theother types of VAT!>

VAT is a hidden tax


Impact% &overnment takeover


VAT taxes services


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'ink% $ervices could get rid of VAT tax on their products


Impact% VAT tax raised higher


VAT causes more state sales tax



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#ecause the VAT rate &ould likely begin relatively high, it &ould leave states little roomto lo&er their sales tax rate to increase their competitiveness compared to other states!/urther, a federal VAT &ould increase sales tax evasion, thus reducing state tax receipts,possibly significantly!>

VAT causes an underground economy


(xample% This happened to (urope


)A% *raud



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refunds than those to &hich they are entitled, rather than evading it outright like in anunderground economy! Jo matter ho& &ell constructed, VATs are al&ays susceptible toscams that allo& businesses to claim larger refunds than they are entitled! VAT fraud cantake the form of false claims of taxes paid, refunds claimed for nonrefundable purchases,businesses set up only to issue false invoices of taxes paid, and hidden sales!>

Impact% 'ost money, (urope losses +. illion dollars annually


Authorities #ill struggle to catch criminals for VAT tax fraud


VAT consumes more of the lo#-income person!s money than a high-income person



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income as VAT than the rich &ould pay! hile measuring income tax paid relative toincome is reasonable, measuring VAT tax paid relative to consumption is also reasonablebecause consumption is the base of a VAT! 3n this basis, a VAT is proportional becauseall taxpayers &ould pay the same amount of tax as a share of their consumption! This isan important distinction because, if la&makers fall for the fla&ed regressivity argument,

then any VAT la& &ould likely exempt certain necessities, such as food and shelter,&hich often constitute a larger portion of a lo&-income person$s consumption spending!>

VAT lo#ers investment, and lo#ers the value of the nations resources


VAT gives more po#er to the government and la#makers


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Impact% government takeover

/nce VAT tax is put in place, it continues to increase



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)A% VAT #ould permanently slo# economic gro#th

'ink% VAT #ould transfer trillions of dollars per year from productive private

hands to the less efficient public sector


VAT &ould transfer trillions of dollars per year from productive private hands to the lessefficient public sector! 3ver the long term, fe&er resources in the private sector &ouldproduce a lo&er standard of living for succeeding generations than they &ould haveenEoyed &ithout a VAT! This lo&er standard of living results from the government

allocating the VAT revenue for political reasons! 3n the other hand, if the private sector isallo&ed to keep these resources, it &ould allocate them based on market considerations!A politiciCed allocation is generally less efficient than market-based allocation becausepolitical decisions do not consider the highest-value use of resources, &hile the marketconsiders such issues and therefore does a better Eob of assigning resources &here they&ill contribute the most to economic gro&th!>

'ink% 'essened incentives


VAT &ould &eaken the economy by &eakening the incentives to &ork! VAT proponentsoften highlight that the VAT, unlike the income tax, is neutral bet&een saving andconsumption! %o&ever, they do&nplay that fact that the VAT, like the income tax,discourages &ork! This long-established fact may not be immediately obvious, but it isevident after analyCing &hy people &ork!

'ink% 0o reason to #ork



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modern living! Kiven an individual$s skills and capabilities and the available marketopportunities, each individual can command a &age commensurate &ith the economicvalue that they can create! Kiven that &age, the individual then kno&s ho& much he orshe can earn by giving up a certain amount of free time or leisure and can choose &hat&ork to perform, ho& long to &ork, and ho& much leisure to take! This is the essence of

the laborLleisure tradeoff in the absence of taxation! 3f course, it is also a broadabstraction and simplification of complex market processes, but is nevertheless a reliableportrait of the issues in this argument!>

Impact% 'ess incentive to #ork


Impact% )amage to the economy

AT% Increased $avings rate1 Turn% )ecreased savings rate



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dip into previous savings to purchase the same amount of goods and services that theyconsumed before the VAT!>

AT% VAT #ould increase investment1 2esponse% VAT #ould not effect savings, so

there is no investment increase, it!s actually likely investment #ould decrease


AT% (conomic gro#th1 Turn% Tax decreases economic gro#th


AT% (conomic competitiveness1 2esponse% )ue to the disadvantages associated #ith

VAT tax it #ould result in little competitiveness



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competitive in the global market! This is false! A VAT &ould have no effect on thecompetitiveness of =nited )tates exports! 3nce again, proponents are confusing thepotential advantages of a VAT as a replacement for the income tax &ith the realities of aVAT as an add-on tax! 5ven if the VAT itself is internationally neutral because of bordertax adEustments, adding a VAT does not reduce the disadvantages imposed by the income

tax, &hich lacks these border tax adEustments and is therefore detrimental to =!)!competitiveness!>

AT% 'o#ered tax rates1 2esponse% Congress #ould most likely not reduce taxes to

lo#er the deficit, but even if they did, a future congress could al#ays raise it


AT% VAT #ould lo#er the deficit1 2esponse% Congress #ould need to have fiscal

discipline to stop spending in order for the deficit to lo#er3



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because they no longer are confident that it can repay its debts! Kreece is a good exampleof ho& this could happen! espite its 10 percent VAT, credit markets have stoppedlending to it at reasonable rates because of its chronic and unsustainable overspending!The credit market may soon stop lending to other similarly fiscally troubled countries thatlevy substantial VATs, including :ortugal @21 percent, Italy @2 percent, and Ireland

@21!( percent! Kiven the political realities, the only &ay to close a budget deficit is toreduce spending! %igher taxes consistently lead to higher spending!>

/verspending has caused the deficits, not lack of revenue



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Curtis )ubay)enior :olicy Analyst, Tax :olicyThomas A! 7oe Institute for 5conomic :olicy )tudies4urtis ubay is a )enior :olicy Analyst at The %eritage /oundation, &here he specialiCesin tax issues!#efore coming to %eritage in Jovember 2, ubay &as a )enior Associate at:rice&aterhouse4oopers in Atlanta, &here he structured international transactions as partof the accounting firmMs Transfer :ricing Kroup!ubay previously served as a )enior 5conomist for the Tax /oundation, &here heauthored three &idely recogniCed and cited reports. NTax /reedom ay,N N)tate-8ocal Tax#urdensN and NThe )tate #usiness Tax 4limate Index!N @Tax /reedom ay refers to thedate on &hich Americans at last have earned enough income to pay the nationMs totalincome tax bill for the year!ubay has done research on the details of a &ide range of taxes, among them income,sales, capital gains, dividends, corporate, excise and international! %e has testified to state

legislatures about ho& to improve their tax climates! )uch ne&spapers and periodicals asThe all )treet Fournal and /orbes have Duoted his vie&s!ubay received his masterMs degree in economics from the =niversity of 4onnecticut in2'! %e also has a bachelorMs degree in economics and leadership studies from the=niversity of 7ichmond! %e lives in ashington, !4!

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negative brief - vat tax

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