Get ready for a new tax: The VAT tax.

Mary Knox Merrill/The Christian Science Monitor
Customers shop at Costco in Victorville, Ca. A VAT tax may soon come into effect for Americans. While the tax won't be seen on receipts, it will be added to each step of the production and distribution of a product, and will be seen in a rise in prices.

It seems that Washington has a plan to pay for all of this new spending. It is another large and complex tax system that seems to be steamrolling its way toward Main Street. Get ready for our own version of a VAT tax.

A VAT tax is one that is added at each step of the production and distribution of a product. It is calculated by estimating the market value added at each stage of its manufacture or distribution. Although much of this tax is hidden from the consumer's view (there goes transparency once again....), it is of course ultimately passed on to the consumer in higher prices.

This is not the same as a simple and very transparent sales tax, which is my tax of choice. VAT is not just added at final point of sale, it accumulates along the way.

What does this mean for small business? Much more complicated tax compliance. If you want to see how complicated it can get, look here at how the VAT works in the UK.

James Pethokoukis has been keeping us posted as to the progress of this new tax at his blog. In his latest post on VAT, he describes a scenario (not the one being talked about currently in Washington that places this on top of the current income tax system) in which a VAT might make sense and be supported by the public:

"First, Washington would have to demonstrate it could manage the public purse by reforming entitlements in a Ryan-esque manner. A tall order, but a necessary prerequisite or else voters would fear that entire six-point budget gap would be closed by tax hikes via a VAT. So, in the end, government spending needs to be dramatically cut. (Preferably, we would never need to get past this step.;)

"Second, a VAT would have to completely overwrite the current complex and inefficient tax code. If not, voters would fear getting hit by both VAT and income tax hikes. A VAT can't be an add on.

"Third, every sales receipt in America would have to indicate the VAT penalty. But politicians love the hidden aspect of a VAT as way of duping voters. To them opaqueness is a feature, not a bug.

"Fourth, the intended tax burden should be kept level at first. A pro-growth VAT -- one that does away with corporate and investment taxes -- might produce more revenue merely by expanding the economic pie."

Although I might buy into this scenario, I doubt the government-happy politicians in Washington would support his plan.

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