Truth and Fairy Tales about Value-Added Taxes
Unlike many other industrialized countries, the United States does not have a national value added tax (VAT). The only consumption taxes we have in this country are the various state and local sales taxes. Because we do not have a national VAT, it is often misunderstood here. So, today's Grassroots Corner will be a lesson on how the VAT works in Germany.
I recently returned from a trip to Germany, where I had lived for six years. While visiting friends in Staufen in the Black Forest, I took them to a Café in town. We ordered two cakes, one coffee, one carafe of table water, and one mineral water. The total (see the above check) was EUR 21.60, including the VAT.
You will note from the check that the VAT is fully disclosed, both the amount and the rate. Many in the FAIRtax movement argue that the VAT is hidden and that politicians use it as a stealth tax. That may be true in some countries, but that’s not the case in Germany, France, Switzerland, and the Netherlands.
How is the VAT disclosed in Germany? At the bottom of the check, the bill shows the net amount of EUR 18.15. The MwSt (Mehrwertsteur), or VAT, is EUR 3.45, also shown as 19% of the net amount on a tax-exclusive basis. The gross amount comes out to EUR 21.60. On a tax-inclusive basis like the FAIRtax, the VAT would have appeared as 16%.
How do the Café’s accountants and their suppliers handle the VAT? Germany and most of the countries in the European Union have a so-called “credit invoice” system. Under a credit-invoice system, the miller who produced the flour for the cakes charges the baker the 19% VAT (tax-exclusive), which the baker pays, and the miller remits to the “Finanzamt” (tax authority). The baker charges the Café 19% VAT for the cakes. But when the baker remits the VAT to the "Finanzamt," the baker takes credit for the VAT the miller already paid. Thus, the baker effectively pays VAT only on the value that the baker added to the product.
The Café charges me the 19% VAT for the cakes when I pay the check. The Café takes credit for the VAT it previously paid the baker and effectively pays VAT only on the value it adds to the service.
As the final consumer, I am at the end of the line. I pay the full VAT and cannot take any credits.
The FAIRtax differs from Germany’s VAT in a very important way. It is levied only on the retail sale to the final consumer. If Germany were using the FAIRtax instead of a VAT, there would be no tax collected or remitted when the miller sells flour to the baker, or when the baker sells the cakes to the Café. Only the Café would have to deal with collecting the tax from me, the retail consumer, and remitting it to the “Finanzamt.”
Arithmetically, the FAIRtax should be identical to a VAT. However, a VAT requires much more administration, thereby increasing the cost of goods and services. Also in practice, a VAT tends to "compound" as tangible goods travel through middlemen to the end consumer. And finally, much "non-compliance" occurs during the interim steps with a VAT.
So, at least in Germany, the VAT is fully disclosed despite other issues.
I recently returned from a trip to Germany, where I had lived for six years. While visiting friends in Staufen in the Black Forest, I took them to a Café in town. We ordered two cakes, one coffee, one carafe of table water, and one mineral water. The total (see the above check) was EUR 21.60, including the VAT.
You will note from the check that the VAT is fully disclosed, both the amount and the rate. Many in the FAIRtax movement argue that the VAT is hidden and that politicians use it as a stealth tax. That may be true in some countries, but that’s not the case in Germany, France, Switzerland, and the Netherlands.
How is the VAT disclosed in Germany? At the bottom of the check, the bill shows the net amount of EUR 18.15. The MwSt (Mehrwertsteur), or VAT, is EUR 3.45, also shown as 19% of the net amount on a tax-exclusive basis. The gross amount comes out to EUR 21.60. On a tax-inclusive basis like the FAIRtax, the VAT would have appeared as 16%.
How do the Café’s accountants and their suppliers handle the VAT? Germany and most of the countries in the European Union have a so-called “credit invoice” system. Under a credit-invoice system, the miller who produced the flour for the cakes charges the baker the 19% VAT (tax-exclusive), which the baker pays, and the miller remits to the “Finanzamt” (tax authority). The baker charges the Café 19% VAT for the cakes. But when the baker remits the VAT to the "Finanzamt," the baker takes credit for the VAT the miller already paid. Thus, the baker effectively pays VAT only on the value that the baker added to the product.
The Café charges me the 19% VAT for the cakes when I pay the check. The Café takes credit for the VAT it previously paid the baker and effectively pays VAT only on the value it adds to the service.
As the final consumer, I am at the end of the line. I pay the full VAT and cannot take any credits.
The FAIRtax differs from Germany’s VAT in a very important way. It is levied only on the retail sale to the final consumer. If Germany were using the FAIRtax instead of a VAT, there would be no tax collected or remitted when the miller sells flour to the baker, or when the baker sells the cakes to the Café. Only the Café would have to deal with collecting the tax from me, the retail consumer, and remitting it to the “Finanzamt.”
Arithmetically, the FAIRtax should be identical to a VAT. However, a VAT requires much more administration, thereby increasing the cost of goods and services. Also in practice, a VAT tends to "compound" as tangible goods travel through middlemen to the end consumer. And finally, much "non-compliance" occurs during the interim steps with a VAT.
So, at least in Germany, the VAT is fully disclosed despite other issues.
I would love to hear how you respond to the question, “Is the FAIRtax a VAT?”
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CALL FOR PICTURES AND WRITEUPS
We need more of you to send in pictures and news. If you have something to share, please send your material to me, jim.bennett@fairtax.org, (908) 578-4975, or fax (908) 598-2888. When others see your activity, they are inspired, and the process snowballs. When the process snowballs, Congress Members, Senators, and even the President start to listen.
Jim Bennett
AFFT Grassroots Coordinator & Secretary🇺🇸 Call For Pictures & WriteUps - When others see your activity, they are inspired, the process snowballs and Representatives, Senators and, yes, even the President start to listen to you and me. Please send your material to me at Jim.Bennett@FAIRtax.org.
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