Fair Tax Nation

Replace All Federal Taxes on Income with the Fair Tax Act , HR 25

All,
One of the misstatements of which many of us FairTax-ers are guilty is the claim that the VAT is a hidden tax, and the FairTax is not. I attach a copy of my hotel bill from a recent trip to Germany, in which the VAT is clearly broken out. The only German you need to know to read the bill is that the German word for VAT is "Mehrwertsteuer," or "MwSt" abbreviated. The rest is numbers.

 

The 4 breakfasts and the telephone calls of 53.20 Euros were subject to a VAT of 19% (tax-exclusive by the way). The room charge of 214.00 Euros was subject to a reduced-rate VAT of 7%. Out of my total bill of 267.20 Euros for two nights for my wife and me, the VAT was 22.49 Euros, and the net-of-VAT charges for the room, breakfast and telephone calls were 244.71 Euros.

 

Given the same rate, the FairTax arrives at the same numerical result, and Title II, Section 510(a) of HR25 requires the FairTax to be separately stated and charged - just as the German VAT is required to be.

 

One of our values as FairTax-ers is that we do not exaggerate the benefits of the FairTax or make unsupported claims. Our real quarrel with the VAT is not whether it is hidden. Our real quarrel is that the current proposal is to impose a VAT IN ADDITION to the panoply of taxes we have today. The FairTax, by contrast, REPLACES these taxes. Our second viable argument against the VAT is that, with the FairTax, the same money changes hands only once because we tax only the final retail sale. With the VAT, the same money changes hands at every stage of production.

 

Please feel free to contact me if you have any questions or comments about the VAT and the FairTax.

 

~Jim

 

PS: By the way, Schloss Auel is a beautiful castle hotel in the Westerwald country, between Bonn and Cologne and a few kilometers to the East. We highly recommend it.

 

~Jim Bennett
38 Fairview Ave
Summit NJ 07901-1728
USA
(609) 984-2901 Daytime
(908) 273-4578 Evenings
(908) 598-2888 Home Fax
(908) 578-4975 Mobile Phone

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Reply by Paul Zuzzio, NJ-03, adding a point I had overlooked:

Jim,

One of the other big quarrels with the VAT, and my personal main sticking point, is that it is varied by target. Your own bill shows this with the varied rates per different parts of your bill. This leads yet again to lobbying and bribes....um sorry, CAMPAIGN DONATIONS..............and more bribes.......oops, I meant EARMARKS....etc ad nauseum.

So just like the "progressive" income tax, we are left at the bottom of the behavior control barrel paying higher tax rates for purchases that are not "approved" while paying lower or no VAT rate for those that have been paid off by the industry.

Very Respectfully,
Paul A. Zuzzio
SFC, CAV
Comment by Karen Walby:


Just want to point out that while Germany discloses the VAT, many countries do not.


Best,

Karen Walby
I should also have mentioned that, when I lived in Germany in the '70's, the VAT was not so transparent. Now that computers are more widespread, that state of affairs has changed.
~Jim
Won't the VAT also add to the price of the product since it is applied at every level of production and we all know that businesses don't actually pay taxes but only pass them on to the consumer? What would the cost of those meals and phone calls have been without the VAT?
Hi Sean. Good to hear from you.

All else being equal, the VAT will add to the price of the product exactly as much as the FairTax will add - no more, no less. But unless the VAT repeals income and employment taxes as the FairTax does, all else is not equal. The VAT becomes an add-on, not a replacement.

Here is how the VAT works. The First Man (1) in the chain of production and distribution sells his raw materials to Second Man, and Second Man pays VAT on the raw materials price to First Man. First Man sends the VAT to the government. Second Man sells his semi-finished product to Third Man. Third Man pays VAT to Second Man on the full price of the semi finished product. But Second Man takes a credit for the VAT already paid by First Man on the raw materials, and Second Man sends the government VAT only on the difference between the raw materials price and the semi-finished price. And so it goes on up the chain. That is why the tax is called a Value Added Tax. Tax, at any time, is paid only on the value added at each link in the chain.

But when the finished good is sold to the consumer at retail, the music stops. The consumer pays VAT on the full retail price of the finished good, i.e., on all the cumulative VATs paid to that point plus VAT on the profit from the final sale. The consumer, who is the last link in the chain, has nobody to whom to sell the finished goods, and no ability to take credit for VAT previously paid.

So arithmetically, the VAT and the FairTax, given the same rate, are the same. The questions become:
1. Does the VAT replace current taxes or merely add on to them?
2. Is it more expensive for tax to be paid incrementally at every step along the way, as with a VAT, or for tax to be paid only once at the final point of retail sale, as with the FairTax? (2)
3. Does the government imposing the VAT impose it in a non-discriminatory way, as does the FairTax, or does the government give concessions to classes of products deemed socially favorable, as with food, clothing, or in my case, overnights in hotels in Germany [requiring non-favored classes of goods to make up for the shortfall]?
4. Does the government imposing the VAT require the VAT to be clearly stated, as do now Germany and most other countries with a VAT? The FairTax must be clearly stated.

The price of my meals and phone calls, without the VAT, would have been 44.71 Euros. With the VAT it was 53.20 Euros.

(1) For the sake of political correctness, the term "Man" includes women.
(2) Some argue that making each person in the chain of production and distribution pay VAT keeps the players honest. If a retailer cheats, he can only get away with the portion of the VAT representing the value he adds to the product or service. But the FairTax also requires reporting of sales by all the players. Each must calculate the tax. All but the retailer can take credit for intermediate sales (or exports; the VAT also is abated for exports). So the FairTax also has an audit trail.

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