VAT (Value Added Tax) has been a well-groomed system by many of the world’s richest economies for years. And once developing countries witnessed just how much VAT can help their rising economies, implementations were in order.
The system just might be even more important in developing economies as it makes it very difficult to evade taxes. And not only that, but it maintains doing so in a very gentle manner, one in which taxpayers are not harshly punished.
When we speak about major economies of the world and how well they use VAT, one would think that the USA would be the pioneer of this system. However, surprising to many, the USA is probably the only developed economy not taking advantage of VAT. Why is this the case, and how much is the economy suffering because of it?
According to The Revenue Statistics 2019, developed countries collect 34% of gross domestic products in taxes, whereas the USA collects about 27%. In most of the developing countries, however, this number ranges from 10% to 20%. The reason behind this is quite obvious, it is harder to collect taxes in developing economies due to a lot of economic activity being informal.
But, when it comes to realizing the importance of tax revenue, there is absolutely no difference between the USA, or, say, Bangladesh. Everyone realizes tax collection plays a crucial role in the overall infrastructure, health, and education of a country.
This is where VAT comes into play.
The Importance of VAT
VAT taxes personal income, only indirectly. Governments collect VAT from businesses, and not households. This leads to a much higher tax collection numbers as businesses naturally bring in more income than an average household – especially in developing countries.
Moreover, in these economies, a lot of people tend to be self-employed, which brings about many problems taxing them. They also often falsify their reported income.
So why might the USA need the VAT system if it is a developed economy? Mostly because the country is losing a lot of money annually by not having this system at all. The IRS estimates that over 60% of self-employed people have their income underreported.
Unlike a sales tax, VAT is paid at every point production stage instead of only at the point of sale. This means that the VAT as a system easily enforces itself.
However, this system brings us to one crucial problem; if a customer is buying a product, they don’t feel obliged to ask for a receipt. This is because they can’t deduct the cost from their income the way businesses can. Therefore, many B2C transactions remain underreported, which presents a significant issue for the local tax authority.
Is There a Solution?
The Government of Fiji in collaboration with TaxCore came to a perfect solution to motivate consumers to ask for a receipt. It presented the CCA (Customer Compliance Award) program. This is a fiscal lottery which a customer can enter by scanning the QR code on the receipt. This way, all the receipts are issued, and customers are helping the tax authority further confirm them by scanning.
If the USA were to ever decide on the implementation of a VAT system, having a good, transparent platform such as TaxCore could bring billions in tax revenue. Moreover, the CCA program would motivate both consumers and vendors to comply. The first would be eligible for rewards, and the latter could build up marketing campaigns around it.