Tuesday, June 14, 2011

Notes from Belgium: A warning about the VAT 

I am in Belgium on business (with my son along for some fun on the side), and -- me being me -- I could not help but pick up a copy of the English-language newspaper Flanders Today. It includes a business news article that ought to remind every American that a value added tax -- often proposed by politicians who want to lower the visibility of taxes to voters -- by necessity ushers in regulation that virtually all Americans would regard as intolerably intrusive.

The organisation representing small businesses in the hotel, restaurant and catering industry in Flanders is to bring a case to the Constitutional Court against a law that obliges restaurants to operate with a new “smart” cash register from 2013.

According to Horeca Vlaanderen, the cash registers, designed to tackle the main methods of tax evasion by restaurant owners, will put one in three establishments out of business by making it impossible for them to employ casual staff, thus increasing costs....

The new system would involve a sort of “black box”, which would register every transaction and would only be accessible to the inspectors of the finance ministry. One of the favourite methods for restaurants to avoid tax is to take meals paid for in cash off the books. The new system would make that impossible. In addition, the registers can only be operated by wait staff who log into the system with their social security number or identity card, so that their employment is also registered.

Now, this system of "black box" registers "accessible to the inspectors of the finance ministry" is obviously a means by which Belgium's government will crack down on businesses that are evading the VAT and employing casual labor outside of Belgium's strict social laws. In other words, some of the businesses that must submit to this requirement are law-breakers, and others must do because the government does not know how to separate compliant firms from non-compliant ones. The real problem, though, is a taxation and labor regulation regime that is so burdensome that there is a huge return on evasion. The evasion, in turn, justifies government intrusion in to every corner of commercial life.

Point is, the next time you hear an American politician or policy wonk propose a VAT, remember that it comes at the price of a massive new regulatory burden that will be alien to the sensibilities of most Americans and offensive to our culture. Politicians will deny it, but there it is, a cautionary tale in the policing of Belgian restaurants.


By Anonymous Anonymous, at Tue Jun 14, 03:39:00 AM:

I'd rather have a VAT over an income tax..but no matter how taxes are structured, I don't want the Gov taking more than 20% of the GDP.  

By Anonymous Anonymous, at Tue Jun 14, 07:14:00 AM:

So, you support even more intolerable economy-choking government overreach? Seems like a foolish idea on it's face given the desperate straits our economy is in. After all, alongside socialized medical care (check) and stratified labor rules (still working on that), a central pillar of the economic decline of western Europe has been it's VAT focused taxation structure, which has driven the growth of massive state employment and economic involvement. Are you an Obama supporter? Don't you just love the regulatory driven growth in government at the federal level? Fool.  

By Anonymous feeblemind, at Tue Jun 14, 09:14:00 AM:

So how does the new cash register keep the owner from taking a cash payment, sticking it in a cigar box and never ringing up the sale?

If there is a strong incentive to cheat, the new register is not the answer. A cashless society, with all transactions made with swipe cards would probably be much more effective from the government's point of view.  

By Anonymous Locker Room, at Tue Jun 14, 10:30:00 AM:

VAT is a bad idea - a way, way bad idea. Consider: it is a very broad tax levied on a huge swath of economic activity that requires a massive, increasingly intrusive bureaucratic overhead to implement and collect it. Once instituted it never goes away and it would appear rather easy to raise. It demonstrates extremely low regard for freedom in economic affairs by the state. Unlike the prior poster, I would prefer a life in the dentist's chair to a living under a VAT.  

By Anonymous Ignoramus, at Tue Jun 14, 10:42:00 AM:

There's a lot of thievery in the bar business. Owners under-report their taxes. Bartenders will rob the owners blind, if they can get away with it.

Owners have been known to send in spies to sit at the bar, nurse a few, and check that all the sales get rung up. I heard one great true story of a spy who kept reporting back that all was kosher. The owner didn't believe it, and kept sending him back.

Until the spy said something to the owner about the "middle register". "Wadda ya mean ... middle! ... there are only two!" "No there are three".

The bartender had brought in his own third register.


Big government types secretly want a VAT. It's not a choice of income tax OR vat. It's AND. How else do you close a greater than trillion dollar annual gap?

The object with the Belgian restaurant example is not so much to raise incremental revenue, as it is to project Perfect Compliance, lest the other natives get restless.  

By Anonymous QuakerCat, at Tue Jun 14, 11:05:00 AM:

Quite possibly the biggest macro issue within America is that only 54% of the population effectively pays taxes. The top 10% pays roughly 70% of the full bill. In no other modernized, first world country is the disparity this great (not even close by the way.) When almost 50% of the citizenry is paying nothing and receiving almost all of the programs provided by the government we as a society are in a terrible pickle. Where before a right minded conservative person who was of lower income, starts getting the gimmies from the government his political choices will change to best favor himself versus the broader society (see Greece as exhibit A.)

The only reason I would be in favor of a VAT (with no other income tax on top) would be that it would spread the sacrifice and create a more fair system than what we are living under today. Our current system will eventually fall off the cliff unless we somehow either cut back the services or insist that those who receive also give (something, anything...).

So for those people who automatically condemn the VAT (and rightfully so if there is also an income tax tied to it)you need to come up with another idea or thought on this because it is only a matter of time when those who are paying the bills will be the great minority.  

By Anonymous Ignoramus, at Tue Jun 14, 12:14:00 PM:

"only 54% of the population effectively pays taxes"

That's only true if you ignore payroll taxes. There is no lockbox, and never was.

Your main point is still valid, but play fair.  

By Blogger Barry, at Tue Jun 14, 12:43:00 PM:

By Anonymous Anonymous, at Tue Jun 14, 03:39:00 AM said I'd rather have a VAT over an income tax

Sorry to disappoint you but if Obama is intent of following the Europeans you will pay tax on your earnings and you will pay tax on the value of services rendered (VAT).
One example that comes to mind of a father who gave his car to his son, who on registering it for insurance purposes had to pay his father the required tax which was in those days 15% on the current value of the car and the father then had the job of submitting the tax to the tax authority.  

By Blogger Gary Rosen, at Tue Jun 14, 12:45:00 PM:

It's not clear to me that a VAT *in place of* the income tax would be any worse in terms of governement overreach, intrusive regulation etc. The problem as Ig points out is the AND, we would almost certainly get a VAT on top of the income tax and that of course would be a nightmare.  

By Blogger TigerHawk, at Tue Jun 14, 01:48:00 PM:

I used to support an American VAT because (i) I'd rather tax consumption than income (since I am a thrifty high-earner) and (ii) it is more broadly based than the income tax, since it hits everybody (meaning everybody has a stake in voting against it, unlike the income tax). I have been persuaded, though, that the VAT is a bad idea notwithstanding because (A) it is stealthy, meaning politicians can jack it up without most voters understanding precisely what happened, and (B) the regulatory intrusion required to enforce it. That said, the arguments pro and con add up to a pretty close call, y'ask me. Which explains the excellent back and forth in this thread.  

By Anonymous Anonymous, at Tue Jun 14, 06:08:00 PM:


Easy, the government simply bans cash transactions. Greece banned cash transactions over 1500 Euro in 2010.


Want to bet that limit drops to 1000 Euro soon, then 500, then 200, then 100 . . .  

By Blogger Dan Kauffman, at Tue Jun 14, 08:35:00 PM:

You write the order up on a paper bill don't ring it up until paid.

If paid in cash you tear up the paper bill ;-)  

By Anonymous E Hines, at Wed Jun 15, 08:23:00 AM:

Easy, the government simply bans cash transactions. Greece banned....

That won't stop cash transactions, that just means reported sales fall off. In a country where refusing to pay the taxes legitimately on the books is an honorable thing to do, do you really think this works? Or even in any other country?

As to the VAT, consider a family of four with a $40,000/year income vs a family of four with an $80,000/year income. Now consider these families with identical $200/month food bills, or $200/month energy bills for heating/cooling their houses, or $200/month xyz bills. Which family do you think gets hit the hardest by a VAT? Imagine the regulations and controls and exceptions "needed" to smooth that out and make the better off family "pay their fair share."

Eric Hines  

By Anonymous Ignoramus, at Wed Jun 15, 10:53:00 AM:

"Imagine the regulations and controls and exceptions "needed" to smooth that out and make the better off family "pay their fair share.""

That's why we need both a progressive income tax AND a vat!

With a VAT you could also create no end of exemptions for favored purchases -- e.g. electric cars (but don't call is a subsidy), or rebates of the VAT for favored groups.

I'm convinced a VAT has been part of O&Co's master plan:

1) Deliberately increase federal spending to over 25% of GDP, knowing that making cuts later will be hard.

2) Use the resulting fiscal crisis as a basis for increasing federal taxes. History has shown that boosting marginal income tax rates alone won't work. Hence the need for a VAT.

I thought that the expanded requirement for 1099s was intended to lay the groundwork for a VAT.

This follows the example of how the VAT got introduced in Europe. VAT rates were initially much like what most of us are already paying in state sales taxes.  

By Blogger Georgfelis, at Wed Jun 15, 04:05:00 PM:

A US VAT will be the worst of both worlds. Everybody will get hosed over on every purchase, and in order to make the tax progressive and "fair", the Government will cut a check to all the low-income peeps to compensate for the taxes they've paid.

The Government will look like a nice kindly Uncle, who writes a check every month to the Poor, ignoring the fact that the money they're getting paid came out of their own pocket just a few days earlier.  

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