Sunday, February 21, 2010

VAT did you say?

In his State of the State address, Governor Pawlenty moaned about high the Minnesota corporate income tax rate is. At 9.8 percent, it is higher than most states. But Pawlenty said, in effect, that we have just about the highest business taxes in the known world. But you should take that with a grain — no, a whole pinch — of salt.

In an earlier post, I said that comparing business income tax rates alone in the abstract and without context is misleading. It could be misleading for a variety of just accounting issues: credits (maybe like the JOBZ program) and other industry incentives, deductions, depreciation allowances, and the like.

But when you look at business taxation internationally, there is another big factor to consider: the value added tax, or the VAT. The United States does not have anything like a VAT. Here’s how the New York Times described the VAT as a graphic a few years ago; It is better than the description that I’ve been working on, so I’ll appropriate the whole thing:

Chart: A value-added tax is basically a sales tax on the difference between what a company pays for raw materials to create a product and the value of the finished product. In this simple example of the manufacturing of a table, a 5 percent value-added tax will be applied several times. Ultimately, this tax is often passed on to the consumer in the form of higher retail prices. 1a. A timber company sells harvested timber to a sawmill for $200 a truckload. 1b. A mining company sells ore to a nuts and bolts manufacturer for $4 a pound. 2a. The sawmill cuts the timber into lumber and sells it to a small table company for $400. 2b. The nuts and bolts manufacturer produces and then sells five pounds of nuts and bolts to the table company for $40 ($8 a pound). The manufacturer is taxed 5 percent on the added value of $20, for a tax of $1. The saw mill is taxed 5 percent on $200, the value added to the timber, for a tax of $10. 3. Using raw materials worth $440 (lumber bought for $400 and five pounds of nuts and bolts bought for $40), the table company will make five tables it will then sell for $1,500 ($300 each). The table company is taxed 5 percent of $1,060 (the value added), for a tax of $53. VALUE-ADDED TAX $10 (lumber) + $1 (nuts,bolts) + $53 (for five tables) = TOTAL TAX (five tables) $64 Total tax on each table $12.80.

Got it? The graphic was not at the link where this description was found; sorry.

Anyway, you can see that the VAT is a sales tax, at least after the sale to the final consumer. If the product is sold at a profit. But at every step in the process to a final sale at retail, it’s a tax on business activity. In the EU, VAT rates are around 20%. And these countries still have corporate income tax and personal income taxes, too.

Canada has a form of the VAT federally, known as the Goods and Services Tax. The rate is, the last time I checked 5%, like the example above. But in addition, some Canadian provinces – and more are joining – are collecting a VAT, too, piggy-backing on the federal system for administration and collections.

As I said before: simply picking one number or rate and highlighting it in splendid isolation is misleading.

And a little tangentially, but not entirely so, there was also a neat little graphic in the Star Tribune Opinion Exchange section today that accompanies an op-ed piece by Charlie Quimby and Dane Smith of Growth and Justice. It doesn’t seem to be available to web readers, so here it is:

moving toward the middle

The chart shows how the spread between the aggregate rates of taxation of the various states isn’t as great as you might think, based on all of the hot air and swamp gas emitted by conservatives on the subject of the business climate in MInnesota.

The hed for Charlie and Dane’s article is “The case for paying higher taxes, happily.” I doubt they picked that title, but one I like better is “The case for paying higher taxes soberly, and responsibly.” It’s a good piece, though; the centerpiece is that we should we should go back to the personal income tax rates of 1999. Spot agrees with that.

Oh, and just one other thing. The source of information in the chart is the Minnesota Taxpayers Association, not the MInnesota Taxpayers League. Entirely different animals.

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