Obama suggests value-added tax may be an option

[alfred russel]

A lot of purchases could be shifted to ebay or other mail order places that may not have a VAT included.

The seller has already paid VAT on the product (unless he or she is outside the VAT-charging country, in which case import duties exceed the savings on VAT)

Shift to a VAT and suddenly we have many more opportunities for tax avoidance.

Disagree completely.

You are right, in the fantasy land that import duties are collected on mail orders from mom and pop shops.

[grumbler]

You are right, in the fantasy land that import duties are collected on mail orders from mom and pop shops.

I have no idea what fantasy land you are proposing here.  Are all your arguments set in this fantasy land, or just this one?

[Martinus]

You are right, in the fantasy land that import duties are collected on mail orders from mom and pop shops.

Are international shipping orders from mom and pop shops a substantial part of US commerce?

[alfred russel]

You are right, in the fantasy land that import duties are collected on mail orders from mom and pop shops.

Are international shipping orders from mom and pop shops a substantial part of US commerce?

No. But aren't we talking about the potential to replace the income tax with a VAT? That would require a very high tax rate--higher than is in Europe today. If I own a convenience store in a country without a VAT, why not open a website where I can sell the same Gillette razors 30-40% less than in America?

[grumbler]

No. But aren't we talking about the potential to replace the income tax with a VAT? That would require a very high tax rate--higher than is in Europe today. If I own a convenience store in a country without a VAT, why not open a website where I can sell the same Gillette razors 30-40% less than in America?

Because the import duties will be 30-40%, and so no one will use your service.

You could try smuggling, of course, but any tax system results in some smuggling or other tax evasion.

[Sheilbh]

This isn't just Obama - though I'm impressed he's mentioned it.  I've read a huge number of arguments from tax professionals since I started my new job that basically say the US should adopt a VAT and some people predict that as globalisation increases and high-earners, like companies, can increasingly move around to choose a tax liability that personal income tax will move the way of corporate income tax. 

All over the world (with the exception of the US, to a lesser extent China and, I think Belgium) corporate income tax has fallen from an average of around 40% to under 30.  This is partly because big companies can move around to avoid high tax on worldwide income and so on (again the US and China are the only countries that are lagging on this and China's come a long way in the past decade or two) but also because they're able to use accountants to more effectively dodge taxes than small or medium companies meaning you have a tax system for all its apparent fairness actually operates rather unfairly, it's also quite expensive for the state to collect.  VAT and low corporate tax, the argument goes, work better because VAT's self-collecting (companies can tax deduct VAT so it's in their best interests to pay it and keep a record - this is why sales taxes of over about 10% don't always work), because of that it lowers the cost of collection, to some extent mitigates against the use of creative tax deductions and loopholes (for example Exxon) and businesses including the big ones are generally happier than to pay VAT than a 40% tax on worldwide income - or in the case of the US 35%.

The big idea is that you'd move to a system in personal tax that was similar.  A moderate tax-free allowance, a reasonable flat tax and a higher rate of VAT.  The problem is it's difficult to get round the unfairness of VAT being, for people, a fundamentally regressive tax.  The best I can think of is that, as in the UK, you make certain items VAT-free.  But, the theory goes, that would be cheaper remove unfairnesses within the income tax system to do with deductions and encourage high-earners to stay tax resident.

It should be an option.  My impression is that the US tax system needs an overhaul to be honest.  My understanding is that it was largely written and last reformed (as opposed to just added to) in the 1960s.  That was, especially in terms of corporate taxation, a very different world.  VAT should definitely be an option.  I think the other argument is that basically VAT's a lot more transparent.

Germany had drastic welfare cuts in the last decade too. So it is possible in Europe as well.

UK's had a fair few too.

[viper37]

To be fair to Mulroney, he said no such thing.  It replaced another tax, the Manufacturers Sales Tax (or some such name), and was supposed to be 'revenue neutral', but it was never said to be a temporary tax.

couldn't find the source, I really thought it was proposed as temporary until the deficit was resolved, but you might be right

And some places dont' have any provincial sales tax to add on to the 5%.

yeah, I know.

[viper37]

You seem to be completely missing the point that the rich will be spending much lower percentage of their income on necessities, and thus if VAT is excluded on necessities, that would make for a progressive taxation system.  Progressivity is defined in percentage terms, not absolute terms.

they consume more and they save more.  What they save is not taxed right away.  What they consume is partially taxed.  It's not totally regressive because of various measures, but it's not entirely progressive, and not a real solution to tax evasion.

[viper37]

But if you take necessities (food, clothing, housing, heating costs) out you are taking out a substantial proposrtion of your tax base (about 30% in the UK). Also, while bread and kids' t-shirts may be a necessity, caviar or posh frocks are luxuries.

here, unprocessed foods are not taxed, but every other thing you may consider "necessities" are taxed.  New housing is taxed, clothing is taxed, electricity&anything you can use to heat is taxed, etc.

[viper37]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

setting different VAT rates on different goods is a bureaucratic nightmare and it ends up costing more to administer than what you gain in revenues.

besides, there are a few things to consider: 

• buying on the internet from outside your country/province/state.  I avoid PST by buying from NCIX.  A company is only forced to perceive taxes on goods sold in the province/country of residence.  Before EA had a studio in Montreal, I could buy my games without taxes.  Now, I need to pay for them, so I use Steam instead.  No taxes.
  
• physical grey market.  Drive 2hrs south from Montreal, go to a Plattsburgh shopping mall, buy stuff you need, come back to Quebec without declaring anything.  No taxes.
  
• Mail order: make sure your stuff crosses the border somewhere in Ontario.  Only GST will be charged (5%), no PST.
  
• Black market.  Drugs aren't taxed.  Illegal booze is not taxed. Indian cigarettes are not taxed.  Renovating your house and paying in cash will not be taxed.
  
• Personal expenses on the company's account.  Declare yourself "autonomous worker".  Deduct a part your home phone bill, electricity bill, and buy yourself computers & softwares you need.  No tax.
  
• etc, etc
  

There's no good way to have a real progressive tax system with only VAT, nor with only income tax, and neither way will help a governement really eliminate tax evasion.

It's not a bad tax, but it's not a good tax either.  In fact, there are no good taxes

[viper37]

I disagree. Any business that can fail to issue an invoice and sell a service or a good "under the table" can also fail to recognize the income from that sale in the income tax filing. And unlike the income tax - which is paid by all citizens, VAT is paid only by businesses, which are much less numerous than citizens (and thus easier to check on) and have less incentives to cheat (unless you are dealing with the original manufacturer of a given good, someone who sells you some good and does it "under the table" is unable to recover the VAT he himself paid when he purchased the good or an input into it).

there are multiple ways to avoid what your describing... You get the tax deduction from the stuff you bought, but you don't pay the taxes on all the stuff you sell
You need to make a step in the real world Marty.

[viper37]

Isn't VAT structured in such a way that everyone has incentives to be honest (unlike the sales tax, where foregoing it can be a competitive advantage)?

duh?  what kind of statement is that?
No one ever asked us to pay in cash (unions excluded) before the government came in with their stupid sales tax of 15%.

[viper37]

I think a lot of people fail to understand this, and thus fail to comprehend the difference between sales taxes and VAT.  Your point is, I think, correct.

Edit:  DG beat me to this point.

unfortunately, you fail to understand that like all taxes, it's fairly easy to avoid a good part of it.  Or to understand that there are a lot of criminals out there who specializes if false billing to make false tax claims, or in restaurants the ever popular 'ZAP' software wich lets a particular restaurant delete half the day's bill in a single... ZAP.

Although the government is very creative in recovering its money (they make false claim themselves, and since you're guilty until proven innocent when it comes to fiscality, it's harder to defend yourself) and will now install a black box, there are still ways to avoid the sales/VAT taxes.

[viper37]

Because the import duties will be 30-40%, and so no one will use your service.

You could try smuggling, of course, but any tax system results in some smuggling or other tax evasion.

NAFTA&EU.  No import duties for most goods inside these zones.  And multiple bilaterals agreement with governments.

Reconstructed cars.  Buy a wreck from the US (say, a flooded car from Louisiana or California) for 10% of the price.  Have the car reconstructed for 20 000$ more.  Pay the tax on your 5000$ bill, the official value of the car.

No import duties.  No tax on 15k$.

Buy a... "work of art".  The price can not be determined precisely, most of the time.  Value is in the eye of the beholder.  Have the artist declare a token value, pay VAT on this value only. 
Sell the work of art a few years later, and you have no capital gains taxes on these type of goods.
http://ca.answers.yahoo.com/question/index?qid=20100206195928AA954TB

[Sheilbh]

Although the government is very creative in recovering its money (they make false claim themselves, and since you're guilty until proven innocent when it comes to fiscality, it's harder to defend yourself) and will now install a black box, there are still ways to avoid the sales/VAT taxes.

They're very different taxes.  Businesses have a good reason to pay VAT, they don't to pay sales tax.  Also I think you're coming on a bit strong about the general anti-avoidance rule and I believe that in the UK it's not applied to VAT because that's rather complicated I think our GAAR is just for direct taxes.