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Euro Blogging: Transparency and the Value-Added Tax in the Czech Republic

1 min readBy: Chris Atkins

Speaking to our group in Prague, Mr. Tomas Sedlacek, from the Czech Ministry of Finance, called the value-added taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (VAT) a “beautifully invisible tax” which raises lots of revenue in an efficient manner. I got firsthand knowledge of this when I purchased a souvenir, looked at my receipt, at could not find how much tax I paid on my purchase. The employees of the store could not tell me either. Later, I discovered that the VAT tax I paid was already embedded in the price of the souvenir—“beautifully invisible” indeed.

Many economists in the U.S. have urged President Bush’s Tax Reform Panel to change the federal tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. from income to consumption. This could be accomplished either through exempting savings from the income tax base (and thereby taxing only the income consumed by taxpayers) or through imposing a direct consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. like a VAT or a national retail sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . While the European experience shows us that a VAT is easy to administer, its lack of transparency would pose problems for the American tax system.

According to data presented to us by the Organisation for Economic Cooperation and Development (OECD) in Paris on Wednesday, the U.S. is the only member of the OECD that does not impose a VAT. This could be because the VAT is too good at raising significant tax revenues in an efficient (and invisible) manner. Americans, traditionally more skeptical of government power than Europeans, may not want to make it quite so easy for their government to raise tax revenues.