Is a National Sales Tax Coming?

In Great Britain and other countries, it is called a VAT (Value Added Tax).  By any other name, it is a national sales tax.  And it may be coming to your neighborhood soon. A recent Washington Post article on the VAT tax got me curious so I started checking on the issue, and how it might affect small businesses. All European Union countries have VAT’s, ranging from 15% to 25%.  A VAT taxes each stage of production, but businesses buying for resale may recover the cost of the tax before moving it along.  The consumer ultimately pays the cost of the tax.

Why a National Sales Tax? The concept of national sales tax has been debated for years.  With the current troubled economy and the staggering national debt, many say it is time to look at this question.  Proponents believe a national sales tax could wipe out the national debt and eliminate the need for income tax (I will believe that only when I see it!). The National Retail Sales Tax Alliance, a non-profit group, argues that a VAT would eliminate the vast IRS bureaucracy and the complex income tax system.

Arguments Against a VAT. Opponents argue that such a tax is regressive; that is, it affects poorer people in greater numbers than more wealthy individuals, because they spend a greater portion of their incomes on taxable items.  If the VAT were used to fund health care, it could provide benefits to offset the regressive nature of the tax. Another way to counter the effect of such a tax on the poor would be to issue a rebate to exempt all consumption up to the poverty level.

How a VAT Would Affect Small Businesses. A true VAT records all transactions by all levels of production, from raw materials, through production, wholesale, and retail.  Every small and large business would be required to record taxes on the value added to the product by their business.  This would mean a huge new record-keeping system each business would have to put in place.  These costs would be added to consumers, which could add to fuel for inflation.

While a VAT sounds like a good idea on the surface, it is probably not the best way to get the U.S. out of its current economic dilemma and there is no doubt that the income tax system will not go away any time soon.  But stay tuned; you never know….

Image: sxc.hu