If you’ve been following my posts about my tentative dissertation topic (and if you have followed it very closely, then I’ll be in prayer for your insomnia! LOL) , then you know that I’m interested in tax policy. Specifically, I want to explore tax policy as it relates to virtual economies, not only with regard to commerce, but also philanthropy. All that is to say … anytime I can focus an assignment on a topic that might help me in my dissertation research down the road, then I consider that a win-win!

In one of my current classes on Governmental Budgeting & Finance, we had to write a concept paper about a budgetary issue, and I chose the Value Added Tax, or VAT. I learned a few new things as I researched the topic, and I thought I’d pass along some blurbs to you. I took the easy way out and copied & pasted a few pieces from my paper, but then I elaborated on it a bit. (Feel free to smile & nod and pretend to be interested.) 🙂

The VAT is one of several types of consumption taxes. In the U.S., we pay a Retail Sales Tax (RST) at the time of purchase for taxable goods. The average sales tax rate in the U.S. was 9.6 percent in 2012. (It happens to be 8.25% where I live, but some places are a little less, while others are up in the mid-teens.) Among members of the Organisation for Economic Co-operation and Development (OECD), the U.S. remains the only country still to prefer the RST over the VAT.

The VAT is hugely popular in Europe; in fact, it’s a prerequisite for membership in the European Union, and more than 150 countries worldwide make use of this tax model. On paper, the VAT is a fair, neutral mode of taxation, in that it is not based on one’s income at all, just on consumption/purchases. It is collected incrementally, from primary producer to manufacturer to wholesaler to retailer. For example, instead of charging a one-time sales tax at the time of purchase, the primary producer would have already paid a fraction of the tax rate when the material was sold to the manufacturer. Likewise, the manufacturer would pay a portion when selling to the wholesaler, and the wholesaler would follow suit when the retailer bought the finished product.

Like the Retail Sales Tax, the end consumer still bears the brunt of the tax, but because the VAT is collected in stages along the production process, proponents say that the VAT helps to close evasive corporate loopholes and retain more revenue for the government. If the tax rate is the same, then consumers would pay no more or less under the VAT than they would with the RST. Therein lies the problem, however! The rates are far from being apples-to-apples, at least in comparison with the U.S. and most European nations.

In 2012, the unweighted average VAT hovered at 18.7 percent among OECD member countries. If you recall, that’s nearly double the average RST in the U.S. Because of this disparity, the VAT may be interpreted as promoting higher tax rates – a notion that is historically unpopular in the U.S. What is unclear to me, however, is if this reluctance is really about the VAT structure, or if it’s more about not wanting to pay European-level taxes. I don’t know of anyone who willingly wants to pay higher taxes, so systems that are in place in other highly taxed regions of the world are often viewed negatively, whether warranted or not.

I’m not a VAT expert now, but researching the issue did open my eyes to some preconceived notions that I had about the idea. The issue has come up in my research on virtual economies, so I will be delving into it further, as time goes on.

P.S. I removed the citations for this blog post, but if you really care about the sources, I’ll be happy to pass the details along.