The Business Consumption Tax
What are the implications?
1. Â It is a hidden tax. When congress wants to raise it only a few greedy corporations will complain. The average voter will be easily sold hikes on this tax asÂ sticking it to the evil rich.
2. It is a tax on labor. Costs of goods and services are subtracted out. It used to be a fundamental conservative understanding that if you want less of something; TAX IT. By way of explaining progressive terminology I remind that LABOR means JOBS for WORKERS. Taxing labor, as this VAT does, means fewer jobs and not as a function of increased productivity (good) but as a function of the tax code (bad).
3. What happens to the jobs? The BCT is an 8.5% tax on labor. First, borderline employees (in terms of cost/profit) are sent home to collect unemployment checks. Second, jobs that can be outsourced/expatriated will have an additional 8.5% incentive to be outsourced. Dellâ€™s new call center can be subâ€™ed out to an Indian company (like their old one) and avoid paying the tax on labor. Microsoft will outsource development to Brazil or China for the same reason. These labor only jobs that lack a tangible product cannot even be taxed at the border. There is nothing to import. Even labor intensive products that can be taxed at the border will suffer job loss since an 8.5% tariff cannot recover the compounding costs of the 8.5% BCT. American companies will spend billions complying with and calculating, and naturally trying to dodge, the tax. A VAT tax totally fails to account for ordinary profit mechanisms as well. As each reseller, from raw materials to refined product, charges the next company in line his normal price then adds the tax on top it increases each companies base costs which in turn magnifies his total cost and requires him to increase his price in order to maintain the same profit margins.
Iâ€™ll illustrate using a quick example:
|Steps to market||No Vat Tax||Ryan Vat Tax||% Cost of VAT|
|Raw Materials Base Costs (equipment, royalties, leases, etc)||$500.00||$500.00|
|Raw Materials Production/Extraction Labor Costs||$500.00||$500.00|
|Raw Materials Profit (20%)||$200.00||$200.00|
|Applicable Ryan VAT Tax (8.5%)||0||$59.50|
|Raw Materials Sales Price||$1,200.00||$1,259.50||4.724%|
|Materials Refiner Base Costs||$1,200.00||$1,259.50|
|Materials Refiner Production Costs||$500.00||$500.00|
|Materials Refiner Profit (20%)||$340.00||$351.90|
|Applicable Ryan VAT Tax (8.5%)||0||$72.41|
|Materials Refiner Sales Price||$2,040.00||$2,183.81||6.585%|
|Materials Refiner 2 Base Costs||$2,040.00||$2,183.81|
|Materials Refiner 2 Production Costs||$500.00||$500.00|
|Materials Refiner 2 Profit (20%)||$508.00||$536.76|
|Applicable Ryan VAT Tax (8.5%)||0||$88.12|
|Materials Refiner 2 Sales Price||$3,048.00||$3,308.70||7.879%|
|Finished Product Base Costs||$3,048.00||$3,308.70|
|Finished Product Production Costs||$500.00||$500.00|
|Finished Product Profit (20%)||$709.60||$761.74|
|Applicable Ryan VAT Tax (8.5%)||0||$107.25|
|Finished Product Sales Price||$4,257.60||$4,677.69||8.981%|
|Distributor Base Costs||$4,257.60||$4,677.69|
|Distributor Labor Costs||$500.00||$500.00|
|Distributor Profit (10%)||$475.76||$517.77|
|Applicable Ryan VAT Tax (8.5%)||0||$86.51|
|Distributor Sales Price||$5,233.36||$5,781.97||9.488%|
|Retailer Base Costs||$5,233.36||$5,781.97|
|Retailer Labor Costs||$500.00||$500.00|
|Retailer Profit (20%)||$1,146.67||$1,256.39|
|Applicable Ryan VAT Tax (8.5%)||0||$149.29|
|Retailer Sales Price / Customer Cost||$6,880.03||$7,687.65||10.505%|
|Added Cost to consumer with VAT mean/percentage||$807.62||11.74%|
Assuming a national sales tax of 8.5% (God Forbid), in the absence of a VAT, the tax would be collected on the non VAT Customer Cost.Â Total Customer Cost would be Customer Cost + 8.5%.
Added Cost to consumer with VAT over straight Sales Tax
|Sales Tax/ VAT Tax Collected||$584.80||$563.09|
Revenue lost to government despite increased cost to consumer compared to a straight Sales Tax.
First, in typical government fashion while driving up costs for consumers the BCT brings in LESS revenue for the government than would a Sales Tax of the same rate. (I donâ€™t support a Federal Sales Tax. They have too much money.) I do not have a â€œdeepâ€ or complex supply chain for my example which might in the real world involve two or three times as many entities in the path from raw materials to retail sales. The more steps to market; the worse this problem would become. On the other hand, really large businesses that control most or all of their chain would see reduced costs compared to my example giving larger business an additional unfair advantage against small business.
It IS unfair because it is a function of the tax code not the marketplace.
Some would argue the elimination of the Capital Gains Tax would cause a corresponding reduction in costs and it would probably affect the final numbers. In fact, in my example, the amount of collective capital gains might well outweigh the added costs of the VAT. The companies might be able to effect a price reduction sufficient to offset the increase caused by the BCT.
But all of my example companies have healthy profits. In the real world one or two will be scraping by. Additionally, many would be pass-through type entities such as LLCâ€™s or â€œSâ€ Corps. Most small businesses are one or the other of these. Unless we are going to eliminate the personal income tax the individual shareholders will not pay a penny less in taxes with the elimination of the Capital Gains Tax.
The VAT might be great for GE and other massive entities with large profit margins. For small business, the engine of job creation, or companies struggling to stay afloat in this economy, it probably sucks. It makes them less able to compete with imports and Big Corporate.
The BCT WILL put some small businesses out of business.
4. A consumption tax at the state level is self-regulating. The higher it gets the more likely folks will drive across state lines to avoid it. THIS IS A GOOD THING. It checks the growth of taxes very effectively.
5. Border adjustable means we will what? Audit foreign businesses to determine their share of tax? Apply a single 8.5% to imports and neglect the â€œcomplianceâ€ costs US companies will have to eat? Watch other countries levy retaliatory taxes on US exports? Forget the WTO nonsense, only the US and maybe the UK gives serious credence to that group of clowns.
6. No reason to believe Capital Gains are permanently gone since the Left can restart it upon retaking the house. AND THEY WILL!!! Oh, donâ€™t worry it will only apply to really BIG and RICH businesses. Right?
7. Imagine a company doing $10M a year in business earning a 3% profit. They are struggling a little. Currently they are paying about $100K in Capital Gains Taxes. Labor costs are 30%, about $3M. Now we get the Ryan BCT. They donâ€™t have to pay those nasty Capital Gains anymore. Instead they will pay the 8.5% BCT on at least $3M or about $265K in BCT Taxes.Â Â Great Deal, huh? It could be worse. A company might be losing 3% in an otherwise similar situation and find they must pony up an additional $265K to cover the BCT Tax leaving themselves 6% short instead of 3%.
The BCT applies whether you are making money or losing it as far as I can see. And when that entrepreneur, who has been struggling to survive this Federal Reserve/Congress induced slowdown, is faced with that; his best option might well be to close it down and lay off the 75 employees he has been trying to support. (Only in Ayn Rand novels, Big Government and Big Corporate do you find company owners entirely devoid of feeling for their employees.) Â Borderline companies might be surviving in this economy then be sunk by this.
8. As a Value-Added-Tax the BCT has another effect. It makes me cautious about adding value. The more value I add the greater my tax liability. I will be more inclined to trade in products instead of making them. If I buy a widget for $100 and sell it for $125 I can afford the tax of 8.5% on $25 ($2.13). If I buy it for $100 and a bad market forces me to sell for $98 at least I wonâ€™t owe any tax. On the other hand, if I make a widget and my raw materials costs are $50 and I add $50 worth of value using employees, and I sell for $125 I will owe BCT on 8.5% of $75 dollars ($6.38). If I have to sell it for $98 again as above I will lose $2 and owe 8.5% on the $48 value added ($4.08). Now my $2 loss becomes a $6 loss.
No, I will avoid making things (Adding Tangible Value) and opt to buy from others for resale. Carry that nationwide and we are again pushing manufacturing jobs overseas so we can import finished products with less tax complications.
9. None of this is meant to imply the Capital Gains is a great idea. It is a terrible idea. The BCT might be worse. Capital Gains Tax forces many businesses to go the pass-through route to avoid being double taxed. By taxing profit it deprives business of capital that could be used as capital was meant to be used. Capital grows productivity. This exposes RINOâ€™s, Progressiveâ€™s, Leftistâ€™s and Socialistâ€™s ignorance of the most important economic law known to man.
Intelligent production is synonymous with wealth.
The intelligent part of production is a function of personal risk for the producer/investor.
The more beneficial products a society produces, the wealthier that society will become.
There is no such thing asÂ â€œtoo much consuming going on.â€ That would imply excess production. Since excess production of a product reduces prices for that product for society as a whole it is a good thing. A true excess, when it happens, results in loss for the investor which is a corrective trait of a free market. Yet even this excess benefits society in most cases since it still provides products at reduced price.
The difference between intelligent production and socialist production is risk of capital loss.
Intelligent production is brought about by private investment of capital for the purposes of profit. This REQUIRES intelligent risk assessment in order to insure proper capital allocation. If the investment doesnâ€™t increase production of desirable items it will result in a personal loss to the investor.Â This natural, inescapable, linking of intelligent capital seeking profit to increased production forces the capital investor to constantly seek ways to invest that capital in a manner which by default increases production. This leads subsequently to increased wealth for all of society. Here is the ultimate truth of capitalism; it is almost impossible to invest capital in a profitable way that does not increase production either directly or indirectly. As a general rule, if it doesnâ€™t increase productivity it wonâ€™t be profitable.
Socialist production involves injection of capital based on political considerations not as a way to mitigate risk of loss or to increase profit. Â This is not to say socialist investment doesnâ€™t carry a risk of loss or gain. It is divorced though from capital loss or gain. Instead any loss or gain that influences the decision making process will be political in nature. This is an important distinction since political profit can often be had by the unconscious or even deliberate loss or misuse of capital. The person making the â€œinvestmentâ€ decision in a socialist context will usually neither gain nor lose based on the Capital Gain or Loss. If existing capital stays flat or worse yet falls then productivity will do likewise.
For you Federal Reserve fans I must point out FRNâ€™s are NOT capital. They are paper that at best represents available capital and QE1.2.3 only serves to reduce each FRNâ€™s fractional representation of actual existing capital and transfers that value to the politically favored.
Flat or declining productivity in the face of increasing population necessarily means an increase in poverty. Generally an increase in poverty is felt as a GAIN by socialists since it tends to increased demand for government interference which translates into a net increase in the available political â€œcapital.â€
A rising tide lifts all boats, indeed. When political capital becomes the master of productive capital an ever increasing percentage of the population begins to see the political realm as the source of wealth. Â People naturally gravitate to the ascendant system whether productive capital or political capital. This means when socialist production is dominate and productive capital subservient to it, the most capable and talented people will pursue political capital even if their desire is for wealth. This drain onÂ intellectualcapital away from true productivity further impoverishes society.
â€œGreed is goodâ€ says Gordon Gekko and as a result Hollywood slanders the system that has peacefully fed more people than ANY other system in history. The interesting thing about greed is that it is not defined exclusively in relation to money. Oxford says â€œintense and selfish desire for something, especially wealth,Â power or food.â€ The greed for power, political capital, has dominated in recent history and has resulted in the murders of more people in the last 100 years than all of the monetary greed in all of history.
Adds layers of confusion and maintains illegitimate Federal involvement.
If states are good boys they gets a check?
No worker left behind accountability?
Why not just get the Federal Government out of the jobs/worker/serf training business?
Budget Process Reform
Here is where we can see Ryan is either not serious or completely disingenuous.
He proposes we bind by force of law a congress that refuses to be bound by constitutional obligation.
I need not touch on every item listed in this section; fromÂ TOTAL CAPS ON SPENDING toÂ SUPERMAJORITY FOR TAX INCREASES they all purport to impose legal restrictions on congress that are both fruitless AND unconstitutional.
First, being mere laws congress can change them as soon as the majority changes again.
Second, as congress already ignores the constitution why would they not simply ignore the law, if changing it isnâ€™t politically expedient? Do we think either wonâ€™t happen?
Third, congress cannot be bound by law from legislating on particular subjects or from taxing or spending. Only the constitution can bind congress in this way and again, lacking any accountability mechanism, they ignore that.
You may have guessed by now I am not particularly a supporter of the Ryan Plan. Which puts me in Newtâ€™s camp at least before he stuck his finger in the air and recanted.
My understanding is Newt thought it a bridge too far. I suspect he gets nosebleeds on a curb.
For me the Ryan Plan bombs because it fails to address the two most important questions facing the US today.
- How to really cut spending to balance the budget and pay off the debt
- What is the proper role ofÂ constitutionally limited government and how do we put it back in that box.
The Ryan Plan doesnâ€™t significantly forestall national bankruptcy and it doesnâ€™t END any federal program I have been able to find. The only credit gets is for being big, it does nothing important.
I know this is supposed to be the “conservative” plan. I don’t see how that can be.
- Paul Ryan vs. Barack Obama (unifiedpatriots.com)
- New Mediscare Ad: Paul Ryan Throws Gramma From a Cliff (michellemalkin.com)
- Ryan’s Budget: A Conservative View-The Excellent, the Good, and the Need for Improvement (redstate.com)
- How will VAT increase affect small business insurance customers? (premierlinedirect.co.uk)
- U.S. Productivity Slowed in First Quarter, Labor Costs Rose (businessweek.com)
Selected from the dispatches by RH, because it is an excellent opinion piece and brings forward important discussion of the VAT tax within the Ryan budget proposal.