VAT – Value Added Tax Explained

in today’s video we’re gonna continue
our discussion on universal basic income by talking about the value-added tax
stay tuned in previous videos we’ve discussed the universal basic income at
length we’re now much more informed about ubi than we were when we first
started one of the main topics that comes up when discussing ubi
is the value-added tax or VAT many of you are concerned about what VAT tax is
some of you see it as something nefarious or underhand you some of you
see it as a way to level the playing field in terms of economic inequality
today I’m going to tell you outright what the VAT tax is what it entails and
how it compares to other forms of taxation in terms of supporting the
economy you can always support us here at smart money’s by clicking the like
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improve your outlook on money and your life let’s start at the beginning by
talking about taxes taxes according to investopedia an involuntary fee levied
on individuals or corporations and enforced by a government entity whether
local regional or national in order to finance government activities Taxes fall
on whomever pays the burden of the tax whether it’s the entity being taxed such
as a business or the end customers of the business’s goods the United States
has a progressive tax system what that means is a higher percentage of tax
revenue is collected from higher earning individuals and corporations it’s
important to note that people pay different tax rates according to how
they earn their money people who work for the money pay income taxes which
tend to be paid at a higher rate in capital gains tax and corporate tax for
example the average single American paid approximately thirty percent of his or
her earnings in taxes in 2015 split between income tax state tax Medicare
and Social Security Capital gains taxes are interesting
capital gains is the difference between the cost of an asset when it’s purchased
versus when it’s sold the taxes on positive difference is called a capital
gains tax if the asset is held for less than a year the profit is called
short-term capital gains and as taxes ordinary income
if the asset is held for a year or more it’s considered long-term capital gains
and is taxed at 0% 15% or 20% according to your tax bracket corporate taxes are a
bit different on paper the u.s. at one time had one of the highest corporate
tax rates in the world at thirty five percent however on December 22nd 2017
President Donald Trump lowered the corporate tax rate 21 percent lowest
rate since 1939 while the corporate tax rate was 35
percent on paper most large corporations never paid thirty five percent in 2017
Congressional Budget Office report noted that the average effective tax rate on
corporations was just 18 point six percent
this means that the average corporation paid less than two-thirds as much tax as
a percentage of income than the average American this also means that the
average corporation was able to lower its tax burden by sixteen point four
percent the corporations are able to reduce their tax burden similarly under
current corporate tax law they could see an effective tax rate of 4.6 percent
where the previous forms of taxes we’ve discussed on levied on income a
value-added tax or VAT tax is a tax on consumption it will be paid at the same
rate by corporations and individuals alike
VAT is added on to products and every point value has been added raw materials
are taxed and he enhancement to the raw materials to make it sellable taxed and
finally the finished product is taxed at sale
many may think that means the value-added tax and a lot like a
national sales tax while it does sound similar there are some key differences
and national sales tax is only paid at the point of sale by the consumer VAT
tax system is invoice based and collected at all points during the items
production every seller between the producer of the raw material to the
seller of the final product charges VAT tax to the buyer the tax is then sent to
the government as of 2018 166 of the 195 nations in the world using that tax all
the top ten economies in the world with the exception of the United States use
of VAT tax including China Japan Germany and India
let’s conduct a thought experiment will say that the United States implements a
VAT tax of 5% the same that Canada currently does how would that look when
put into practice the first difference is that you take home or be a paycheck a
VAT will replace income tax returning an average of 13.5 percent of your gross
pay your paycheck before taxes to you if average American makes forty six
thousand eight hundred dollars per year and he or she currently pays about
thirty percent in taxes the person actually takes home thirty two thousand
seven hundred and sixty dollars per year or twenty seven hundred and thirty
dollars per month under a VAT tax average American would still make forty
six thousand eight hundred dollars per year they only pay around sixteen point
five percent in taxes the person actually takes home forty thousand five
hundred and eighty one dollars per year or thirty three hundred eighty one
dollars per month let’s assume you’d like to put that extra money or now make
me toward buying a cell phone how would that work the manufacturer of the phones
electronic components let’s call them smart electronics purchases metal from
the supplier supplier charters smart electronics with one hundred dollars
plus a five dollar VAT the supplier pays the five dollar VAT to the government
smart electronics adds value by creating electronic components they sell these
components to the cellphone builder let’s say Samsung in this case smart
electronics charges Samsung two hundred dollars plus a $10 VAT smart
electronics sends five dollars of the VAT it collected to the government and
it keeps it other than five dollars as reimbursement for what they already paid
to the metal dealer Samsung adds value by making cell phones
they then sell the phones to Verizon for three hundred dollars plus a fifteen
dollar VAT Samsung pays the government five dollars of the VAT and keeps the
other ten dollars as reimbursement to what they already paid to smart
electronics lastly Verizon sells you the phone for
five hundred dollars plus a twenty five dollar VAT Verizon pays the government
ten dollars The VAT paid at each point of the products construction represents
5% of the value added by the seller some might believe of VAT tax will
negatively impact the country’s ability to make money there is no evidence to
support that for example the United States expects to collect two point six
trillion dollars in federal state and local income tax in 2020 the
Congressional Budget Office’s Joint Committee on taxation estimates that
paying five percent VAT tax on a broad base of goods and services would raise
over three trillion dollars per year four hundred billion dollars more than
income taxes are expected to produce supporters of VAT like it for many
reasons they believe that VAT encourages corporations to pay taxes and
disincentivizes attempts to avoid tax compliance is rewarded to each step of
the process because manufacturers and retailers are responsible for collecting
that from the goods that they create or sell VAT is a productive way to
raise tax revenue improve tax collection efficiency increase in nation’s gross
domestic product and eliminate budget deficits VAT’s detractors raise valid
concerns as well they argue that VAT is similar to a flat
tax making consumers of all income levels pay the same rate they argue that
this disproportionately impacts people of lower incomes the income inequality
argument has been recognized and addressed by several nations who use a
VAT tax Canada and United Kingdom offer many tax exemptions they are normally on
leads like children’s clothes childcare and groceries in the current US tax
system the average single American pay significantly higher percentage of his
or her income in taxes than the average large corporation VAT tax is seen as a
way to address that concern VAT is a tax on consumption that is used around
the world to ensure that people are only taxed on what they spend each point of
production supply chain is taxed the same rate in the United States the
government was telling the profit from implementing a VAT tax over the current
progressive tax structure well that’s my video on value-added tax explained I
appreciate you watching let me know any questions comments on top of suggestions
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7 thoughts on “VAT – Value Added Tax Explained

  1. Thanks for putting together this video. What do you think will happen to prices to the end consumer with the VAT tax? I would think it's going to increase the price since the cost of goods will go up for every step in the process. I also think it will encourage those with deep pockets to eliminate some steps and complete more work themselves to get the advantage of lower costs.

  2. An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax.  ZERO

    On average, those in the bottom 40% of the income spectrum end up getting money – refunds – FROM the government.



    Meanwhile, the richest 20% of Americans, by far, pay the most in income taxes, forking over nearly 87% of all the income tax collected by Uncle Sam.

  3. Sure it will raise tax revenue but we have no control over what the government does with that money. The government can just give it away as foreign aid. In that case the VAT would not help grow our economy.

  4. In England, Wales and Northern Ireland tax is payable at the basic rate of 20% on taxable income up to £50,000. In Scotland tax is payable at three different rates (19%, 20% and 21%) on taxable income up to £43,430.

    So in the UK people pay income tax and VAT.

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