Newspaper article THE JOURNAL RECORD

European Value-Added Taxes -- Good or Bad?

Newspaper article THE JOURNAL RECORD

European Value-Added Taxes -- Good or Bad?

Article excerpt

Last month it was my privilege to lecture about the American tax system at the University of Oklahoma's sister universities in Bordeaux and in Clermont-Ferrand, France. Shopping, eating, and drinking fine wines filled much of my spare time.

And there was one special treat about shopping in France. There are no sales taxes in France. No 4.5 cents per dollar for the governor, and no 4 cents per dollar for the mayor. The price is the price. They don't add an 8 percent or 9 percent sales tax, like we do here in Oklahoma.

That was good for me, because what with all those great wines I was drinking, it was tough enough for me to figure out how much things really cost. Imagine their audacity -- those French. Everything was priced in French francs instead of in good old American dollars. (The exchange rate is about 5.6 French francs to the dollar.) Don't get me wrong. The French pay lots of taxes -- lots more than we do in the United States. According to the Organization for Economic Cooperation and Development (www.oecd.org), taxes take 44.5 percent of France's gross domestic product but just 35.3 percent of our gross domestic product. For example, gasoline costs about $4 a gallon in France -- largely because of taxes. My French friends were amazed that we can buy gas for less than a dollar a gallon. Also, they joke that, "We have no petrol, but we have ideas." And they don't have a sales tax. Instead, they have what is called a value-added tax or VAT, for short. The nice thing about a VAT is that when you get to the cashier, you don't have to do any more math to see if you have enough money for all the goodies in your basket (or in your tummy). Instead, the VAT is hidden in the stated price of goods and services. In France, more than 20 percent of the price of goods and services goes to the French government in value-added taxes. No wonder they have to hide it! Here's how it works. Unlike our sales tax, which is collected only on retail sales to customers, the VAT is a multistage tax that is collected at each level of production. The VAT is a tax paid by each business on its increase in the market value of the goods or services that it produces. This increase in market value -- the value added -- is the base on which the tax rate is applied. For example, consider a multistage value-added tax of 10 percent. A mining firm would pay the VAT on the difference between the mineral it sells and the cost of supplies needed to recover that mineral, perhaps adding $90 dollars of value to each $100 of mineral sold. A second firm that buys $100 dollars of that mineral from the first firm and makes a widget that it then sells for $150 adds $50 of value. Finally, a retailer that buys the widget for $150 and sells it to a customer for $250, adds another $100 of value. Under a VAT, the mining company would pay $9 of tax on the $90 of value it added, the manufacturing company would pay $5 of tax on the $50 of value that it added, and the retailer would pay $10 of tax on the $100 of value it added, for a total value-added tax of $24 on the widget. …

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