VAT in USA Essay Examples & Outline
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VAT in USA
Value added tax is the taxation on the products that have undergone any form of processing. Value added tax is taxed on any single change in the product. The tax is capped at a certain percentage and applied to all processing of raw materials to add value. The tax is applicable to the products that have undergone further processing and manufactured goods.
Common approaches to computation of value added tax are the calculation of the total value added to the product after the processing or further changes have been included. The premise of the tax is the transformation of the product and the improvement that ensues from this transformation (Ashta n.d). The United States does not use the system of taxation. In its place, it applies sales tax that increases with the value of products that the company sells.
In the recent times, the law-making bodies in the United States have proposed the special kind of sales tax in from of value added tax. The lawmakers envision the tax to be the cure for the budgetary problems that are being witnessed in the current taxation systems. Value added tax would be collected from the manufacturer as opposed to the sales tax that is collected from the sales people (Correa Cervera, n.d.). Collection of the value added tax from the manufacturers assures the government of some level of tax inflows that may be composed of the value additions that may occur at later stages in the value chain. Therefore, the tax will be easier to collect.
Only the state of Michigan applies the value added taxation system. However, other states have pondered over the adoption of the taxation system as the most effective way of dealing with the taxation issues that they witness (Correa Cervera, n.d.). However, there are various voices on the issues that may arise from the value added tax. Most of the concerns are voiced by the manufacturers that will have to pay additional taxes to the government on top of the common corporate tax. The paper will investigate the viability of the tax system despite the different voices raised over its suitability in the American context.
Value added tax system working is based on the value added at each point in the production system. The value added in products is the amount by which the prices of the product exceed the costs of the materials used in the production process. The value of the tax paid is added to the final price. Therefore, the customer still is the one that pays the tax in the end.
The fact that the tax is not itemized in the bill to the customer, there is a temptation to view it as a tax on the business. This might be the case; however, the tax is not handled by the company. It is not like the corporate tax that is paid to the government from the profits. The company eventually adds it to the final product. This makes the classification of the tax as a tax on business faulty. Therefore, value added tax is a form of a sales tax. The only difference between this tax and sale tax is the collection of the tax (Ashta n.d). Value added tax is collected in stages as opposed to the sale tax that is collected at the end of the sale has been made.
According to the fairness perspective, value added tax is a regressive system of tax. The tax requires the poor consumers to pay more tax than the wealthier consumers. Poor consumers pay more tax in proportion to their income levels. The wealthier consumers rarely feel the effects of the tax since it is meager compared to their level of income.
The only difference between the taxation systems is that it is collected in the intermittent levels at the end of each production stages (Correa Cervera, n.d.). The advantage of this collection approach is that the government has an assurance of some tax inflow. It also means that the tax net is spread to the companies involved in the different levels of production. At the end of the intermittent tax collection, the customer has an imposed tax in the form of value-added tax (Mikesell, 2014). The customer's perspective on the same is that the government has imposed a tax on the final price.
Reasons behind the adoption of the tax system
The imposition of the tax is determined by two goals that the tax policy makers may want to change. One of the goals is determined directly by the tax system that they would like to replace. The development of the taxation system in Europe was informed by the need to eliminate the structural problems that arise in the collection of the sale tax (Ashta n.d).
This motivation is important more so when the sales tax is imposed on the final retail transaction as well as the business-to-business transactions. The business-to-business transaction ought to be the exempt since the imposition of the tax on them leads to instances of double taxation. The product will eventually be taxed. Therefore, the inefficiency of the taxation whereby the sales between the businesses are taxed, and customer is taxed too motivated the development of the taxation system (Correa Cervera, n.d.). Therefore, in order to reduce such issues, the government can come up with the value added tax system to replace the traditional sales tax.
Taxing the business inputs leads to a situation known as pyramiding. This problem arises when the value added tax is imposed on all the inputs used in the production of a certain product. Pyramiding is an undesired effect that has to be eliminated to remove the need for the increased taxation of the people. The tax burden in the taxation system is too much such that it makes the VAT system too oppressive more so to the poor members of the society.
Pyramiding also leads to the regressive nature of the tax system as well as increase in the unpredictability of the system. The number of times that the tax is paid depends on the levels of production or the stages in the production (Mikesell, 2014). This means that the production systems that have more stages of production will have a higher value added tax.
In order to reduce the number of stages in the production of a certain output, the businesses are forced to adopt a vertically integrated system whereby the number of players in the production system is reduced. This means that the business will not pay taxes on the inputs that are present in the production process. Therefore, the VAT system ought to be designed to avoid imposition of the tax burden on the business inputs (Ashta n.d). Taxing business to business, transactions ought to be avoided. Reduction of the number of times and organization is taxed.
Well-designed value added tax systems are ideal in that they do not have the issue of pyramiding which was the main reason for the abolishment of the sale tax system and its consequent replacement with the VAT.
In the case of Michigan, the adoption of the VAT system was to replace the corporate income tax. This means that the rationale did not arise from the need to develop a system that will reduce double taxation on the customer at the retail step (Correa Cervera, n.d.). The fluctuating nature of the corporate tax is hinged on the profitability of the organization over the periods (Zabov, n.d). The states adopted the value-added tax since it was a better mode of taxation.
The taxation is based on the value that the company adds to the inputs before pushing the product to the market. As long as the company is in production, the value added will always be present. Therefore, the tax system is more predictable. The taxation system provides the government with the revenue stability hence enhancing the predictability and budgeting accurateness.
VAT has the merit of the enhancement of the horizontal equity. The taxation system ensures that the products are taxed in the same way regardless of their level. Each transaction receives the same treatment regardless of the sale price (Ashta n.d). The sales tax tend to tax the highly priced products more than the other products that may be lowly priced. Replacement of the corporate income tax with the VAT increases the predictability of revenues that the state will collect at the end of a certain period.
The adoption of the taxation system in the United States will be more difficult than anticipated. On one hand, there is a widespread clamor for the adoption of the taxation system given the success in the European context (Mikesell, 2014). However, in the United States, it is not a guarantee that the other states will adopt the same approach. This creates issues when dealing with trade between the states. Therefore, the value added tax has to be applied in all the states.
The common tradition is not to itemize the tax on the receipt unlike in the case of the sales tax. This means that the customers will be unaware of what proportion of tax they will be paying. The invisibility of taxes will cause issues in terms of the knowledge of customers. It may also affect the vigilance by the customers on the proportions of the prices that contribute to the tax. Therefore, the government ought to shift from this tradition by itemizing the tax on the receipt.
The reference to the tax as a single business tax, as it is the case in Michigan may fool the people into believing that the tax is imposed on the business (Ashta n.d). This reference will aggravate the fact that the majority of the people are unaware of how the VAT system works.
Ashta, A. Strategic Aspects of Value Added Tax (VAT). SSRN Journal.
Correa Cervera, J. The Single Rate Business Tax: A Value Added Tax?.
Mikesell, J. (2014). Misconceptions about Value-Added and Retail Sales Taxes: Are They Barriers to Sensible Tax Policy?. Public Budgeting & Finance, 34(2), 1-23.
Zabov, L. Comparison between Value Added Tax and Sales Tax. SSRN Journal.