From what I am reading, there is a serious effort to install a Value Added Tax in the US. And from the descriptions given of this tax system by commentators, the taxpayers in the US have no idea how this works.
I am quite familiar with this system due to the fact that I have lived in México for almost 19 years. I have been in business (as a consultant), have worked in upper corporate management and in mid level management. And I am familiar to what we call IVA (Tax Value Added in Spanish). México has an IVA rate of 16%, up from 15% a few years ago. This tax is applied to all products of “legitimate” businesses. The exceptions are basically for food and medicine. This is how it works:
Say that you are a molder of plastic parts that you sell to a company that makes widgets and sells the widgets to retail stores. When you purchase your raw material, fuel, labor and other business related services and products, every invoice that you receive has the 16% IVA added. And after you process the raw material, pay for the labor, IVA and so on, you sell your product to the widget company covering your costs and profit and add to your invoice the additional 16% IVA. In settling with the federal government, the IVA that you paid to your suppliers is a credit to you. When you are charging IVA on the higher cost to your customer (with value added), you end up paying the federal government for tax on only the additional cost, because the tax paid to your suppler is a tax credit to you. This occurs at every step along the line.
Now, when the retailer, the last step on the process, sells the widget to a customer he, of course, adds the 16% IVA. But the final customer has no one to pass the IVA on to. So, in effect, we have a system that collects the IVA at every step of manufacture through sales giving the government 16% IVA of the value added at each step. And the final customer pays again! In reality, the 16% IVA is paid twice with the government getting almost double the advertised rate. But the end customer only sees the 16% IVA on his invoice. This is what I mean by a stealth tax.
Simply put, when the final purchaser pays the basic price of the goods, included in that price are the IVA taxes collected by the government at every step of production.
Some details on how this tax is handled: To charge for IVA, you have to be a company or service registered with the government and have a tax identification number (RFC). Your invoice must carry an approved and registered government seal that states your RFC. And as a business, you can only deduct costs paid to real companies that you have paid the IVA on. The other side of the coin is that as much as 40% of business done in México is done on the “informal” market. No benefits for workers, no taxes collected or paid. Try to get your auto fixed, or get some construction work done at your home. You will deal with the informal market. And this includes all of those informal little stalls at the local flea market that sells anything from food to small appliances. This is part of our culture and this is not going to change easily.
The company in the manufacturing chain that purchases something from the informal market cannot pass on IVA which he didn’t pay and he cannot deduct these purchases as a business expense from his federal income tax. But he doesn’t pay the initial IVA.
Because if the importance of the IVA to the government, businesses are audited very carefully on the IVA transactions. However México’s income tax is collected as a rather low amount as a percentage of the total domestic product (GDP). México’s total income tax (ISR) collected as a percentage of GDP is about 11%. Low, even across Latin America.
A mid level manager pays around 13% ISR on his salary. And if you have not accumulated a lot of deductible costs, you don’t even have to file. It is just withheld from your pay. No income tax forms to fill out.
But the IVA system, with all of the tax identification numbers makes the system rather easy to audit and track. In fact, even for a printer to print invoices, he has to be officially registered to print the IVA logo on the invoices.
For a long time, México has been able to cover 40% of the cost of government with oil exports from the government owned PEMEX company. With the easy oil running out, the Mexican government is first trying to cut as much cost as possible out of the government cost. As I said before, we did have an IVA increase a few years ago, but any more would be a third rail electrocution for even suggesting that.
Some government services have had cuts applied to the amounts and benefits paid to those employees. Like the health service for government workers that paid pensions to retirees at 105% of their highest pay after 52 years. Now, all new hires are paid pensions at a lower rate . . . after a big showdown. México is limited to budgets with no more than a 3% annual deficit. This came about after the melt down in 1994.
The federal government recently shut down a large government electric utility due to high costs run up by an aggressive union and not so aggressive politicians. Forty-thousand workers were let go and replaced by around fifteen-thousand employees to do the same work, by another government electric company.
So, to our US cousins, if you are going to see a Value Added Tax, be aware what you are getting into. Especially if there is not a MAJOR lowering of federal income tax. Oh, by the way, there are no state income taxes here. For the most part, the states receive a portion of the federal taxes for their expenses.
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Richard N. Baldwin T., a HispanicVista.com (www.hispanicvista.com) contributing columnist, lives in Tlalnepantla, Edo de México. E-mail at: [email protected]