By Peter Elkind, editor at large
FORTUNE -- For many years, Amazon.com enjoyed a crucial leg up compared to traditional retailers like Barnes & Noble, Sears, and Wal-Mart: The e-tailer didn’t charge sales taxes to its customers. The result: Amazon benefited from as much as a 10% pricing advantage over its rivals, one key reason behind the company’s meteoric rise.
Levy has raised around £1.6tn but has become a headache for business with hopes for a cheap and simple EU tax in the past .
This article is written by Juliette Garside and was published in The Guardian, on Sunday 31 March 2013 19.35 BST
Jaffa Cakes … cake or biscuit? The tribunal decided they were indeed cakes, and could therefore be zero-rated. Photograph: Martin Lee/Rex Features
Pink Floyd had just released The Dark Side of the Moon and the doors of the London Stock Exchange were finally open to female members when Conservative chancellor Anthony Barber introduced the nation to value added tax.
Imposed as a condition of Britain’s joining the common market, VAT is 40 years old on Monday and it has so far raised £1.6tn for the public purse, according to a study by the accountancy company Deloitte.
Designed by French tax expert Maurice Lauré in the postwar years and first levied in the UK on April Fools’ Day 1973, VAT is now the government’s third largest source of revenue after income tax and national insurance.
But what started out as a simple, easy to collect tax – a low, flat rate imposed on most goods and services – has become increasingly complex, with exemptions for everything from children’s clothes to Jaffa Cakes.
“The initial idealistic hope that it would be a simple tax, easy to apply, has constantly been eroded because there are always special lobbies,” said Deloitte tax expert Daniel Lyons. “Politics and economics got in the way of simplicity.”
Today, many of life’s essentials are not liable for VAT, including water, eggs, fish, milk, butter, cheese, newspapers, books, nuts, prescription medicines, cold sandwiches, tea, coffee, cooking oil and cereals. Other goods and services including zoos, burials, antiques and TV licences are simply exempt.
VAT was a European replacement for the purchase tax, which was charged at different rates according to the luxuriousness of an item. The new levy, a flat 10% on most goods and services, was in theory simpler to administer.
Paid by the buyer but collected by the seller, it is still one of the cheapest taxes for HM Revenue & Customs to administer because it requires businesses to act as tax collector.
It even had its own, user-friendly tribunal, where business owners could represent themselves when pleading their case.
But just one year in, Labour chancellor Denis Healey began to muddy the waters. He reduced the standard rate to 8%, but introduced a higher rate of 12.5% for petrol and some luxury goods, doubling the upper rate later that year to 25% before lowering it in 1976.
In 1979, the higher rate was abolished and the standard rate increased to 15%, where it remained until Conservative chancellor Norman Lamont increased it to 17.5% in 1991. Lamont also imposed an 8% rate on domestic fuel and power, which had previously been zero-rated.
The 1997 general election swept Labour to power and with it came a new series of tweaks and exemptions. Gordon Brown brought domestic fuel and power down to 5%, and knocked money off the rate for home insulation materials. He applied his own moral stamp, with VAT reductions on nicotine gum and other stop-smoking products, along with contraceptives, tampons and children’s car seats.
The recent banking crisis brought further changes, when Labour chancellor Alistair Darling cut the rate to 15% from December 2008 in an attempt to boost consumer spending. The discount was short-lived; a year later the rate was returned to 17.5%.
On 4 January 2011, the current chancellor, George Osborne introduced a 20% rate – a centrepiece of the coalition’s austerity drive – meaning in 40 years the tax rate on goods and services sold in the UK has doubled.
VAT appeals have become expensive and complex, too. Bringing a case can cost £100,000, says Lyons at Deloitte, with most businesses choosing to hire accountants, lawyers and senior barristers instead of representing themselves.
Advertisers are in full swing, maximising the final hours before the red day, the day of love, Valentine’s day! Or ‘Loveville’ as I prefer to euphemise this particular ideology. It’s all spend, spend, spend. On roses, dinner and presents galore. Don’t get me wrong, like any other enthusiast, I don’t really need a reason to have a party however: the speciality of this day is the implied guidelines under which it is dictated; the red, flowers, chocolates. Just because it’s red doesn’t mean that we will get a Value Added Tax (VAT) write off for love. Yes, flowers have a special place in the exempt echelons of agricultural produce but ultimately, are they really free? Chocolates are taxed. Hence, I made my crossover, from the red flower totting, wine sipping, chocolate receiving undergraduate, to the ‘plan before you spend’ tax lawyer to the big spenders.
Cue my title: No romance without finance
Seanice Kacungira of 88.2 Sanyu FM, I love your morning show and paid special attention to the topic about having a relationship on a budget (Taxes notwithstanding). I understand the need for honesty (to the tax collector as well as the boyfriend), however, I do not think it is possible to always:
1. Live on a budget of romantic walks; what happens when we get thirsty along the way?
2. Cook together most of the time; I’m no Nigella Lawson
3. Watch bootleg DVDs at home; copyright infringement.
I agreed with the caller, I think his name was James (like your co host Fatboy) who encouraged both parties to work harder and have what they both perceived would be a better quality of life.
And to my cousin Brenda Sekabembe, proprietor of the tasty ‘Bake for me’ cakes (you can find her on Facebook), “You were right, what is love in Umeme darkness on Valentine’s day”. To Umeme Ltd, ” Your rates are crippling, there’s nothing left over for romance.”
So, February 14 2013, no romance without finance!
On to Romance with finance; along the lines of Reality television star Kim Kardashian’s present to musician boyfriend Kanye West: A Lamborghini Aventador as below.
And then in came the heavyweights Zari and Ivan Semwanga with the first Lamborghini on the dusty streets of Kampala, in the Christmas holiday season. If this was a Loveville present, it surely was over the top. All I can say is that if you two had unveiled that beauty on February 14th 2013, more than hearts would have been broken.
To all the rest, please remember to plan before you buy.
Love thy neighbour the tax man, be honest in all your dealings, be committed to paying all your tax dues, share all your income, forgive all indiscretions, always wait patiently for the servers to reboot and forget the small things like expired passwords or late notifications. Happy Valentine’s day everyone.
As January 2013 ticks by and new resolutions are set for some, below is a reminder of what was going on yester yester year. In Uganda, we spend more time watching and sympathising with medical personnel in the public sector who have previously seen it fit to down tools for better pay. A suggestion would be for them to lobby for lower P.A.Y.E tax so that as the pay raises are slow in coming, 30% of their monthly income won’t still be reverted back to the state coffers while they wait. Happy New Year!
Doctors And Lawyers Locking Horns Over Taxes
Sep. 8 2010 – 9:56 am | 252 views | 1 recommendation | 0 comments
By ROBERT W. WOOD
Doctors and lawyers may both be professionals, but there’s often no love lost between them. And mentioning tort reform to either group can prompt an extreme response. Throw taxes into the mix and it’s even more interesting. Lawyers are lobbying Washington for better tax treatment for their contingent fee cases, but doctor groups like the AMA have lined up claiming passage will give rise to even more lawsuits, many of them plaguing the healthcare field. See AMA, 90 Medical Organizations Oppose Tax Changes That Encourage More Lawsuits.
The issue is how lawyers deduct costs. Contingent fee lawyers nearly always front all costs in each case, so the client pays nothing unless and until there’s a recovery. Costs including filing fees, deposition transcripts, copies, travel expenses, expert fees, and more. In a big case, costs can total hundreds of thousands of dollars and can mount up for years. Paying but not deducting them hurts.
When the case finally pays off, lawyer and client will settle up, with the lawyer usually reimbursed for all costs before lawyer and client split the recovery 60/40 or in whatever percentages they’ve agreed. Because the lawyer is reimbursed, current tax law treats the costs as loans by the lawyer to the client. That means the lawyer can’t claim any tax deduction until the conclusion of the case. It’s costing lawyers billions, making lawsuits much more expensive.
But all that may change. Under S. 437, introduced by Senator Arlen Specter, D-Pa., lawyers would be able to deduct costs immediately as long as their fee agreement calls for a “gross” fee. A companion bill (H.R. 2519) was introduced in the House by Artur Davis, D-Ala. A gross fee arrangement splits the whole recovery (60/40 or in some other proportion) without any direct reimbursement for costs. Lawyers would be free to factor in the likely costs of the particular type of case in setting their percentage split, but they could have no detailed accounting for costs.
This is a good deal for trial lawyers, and would expand a key but controversial tax case decided 15 years ago. Lawyer groups have championed the provision, but the likelihood of its passage looks dim, even dimmer now that the AMA and others are sounding a lawsuit floodgates alarm. For more on this brewing tax issues, see:
Which Client Costs Are Tax Deductible? Part 1 of 2
An interesting read by Reihan Salam , published on April 17, 2012 11:54 A.M. on NRO’s domestic-policy blog The Agenda.
Having recently discussed Len Burman’s vision for a sustainable tax reform, I was interested to read his critique of the Buffett Rule:
The Fair Share tax is not the right tool for this job. It is bad policy. If it became law, it would needlessly complicate taxes and create new inequities. In so doing, it would repeat an egregious error made 43 years ago when Congress created the first minimum tax in a poorly executed effort to rein in tax breaks for millionaires.
Burman offers several examples of perverse outcomes that might flow from the the Fair Share tax:
For example, imagine two elite lawyers, each making $999,000, who are considering marrying. They would owe no Fair Share tax if they stayed single but could owe tens or even hundreds of thousands of dollars in additional tax if they married.
Or consider if you were on the cusp of paying the Fair Share tax: you wouldn’t know at the beginning of the year whether your capital gains would be taxed at a rate of 30 percent or 15 percent; it would depend on whether you were ultimately hit by the tax….
More fundamental is that the idea of three different sets of tax rules — regular tax and alternative minimum tax and fair share tax — makes no sense. One set of rules should apply to everyone, and if we close some loopholes, a reformed tax code could satisfy the goal of the Buffett Rule.
Rather than add a new set of tax rules, Burman favors eliminating the favorable treatment for capital gains and dividends, an idea we’ve discussed a number of times in this space:
Specifically, we should fix the regular income tax to eliminate or curtail the tax loopholes that let rich people avoid tax, especially the lower tax rates on capital gains and dividends. And while it’s true that taxing capital gains at rates up to 35 percent (the current top income tax rate) might be counterproductive (because many investors would choose to hold on to their shares rather than pay the tax), there are other options. For instance, the top rate on capital gains could be raised from the current 15 percent to 28 percent — the rate set by Ronald Reagan’s Tax Reform Act of 1986, but undone in stages by tax changes under the administrations of Bill Clinton and George W. Bush.
This is a proposal Burman has been advancing for some time, and his contributions shaped the Debt Reduction Task Force’s decision to subject ordinary income and capital gains and dividends to the same rates of tax. Burman is less concerned about double taxation and lock-in effects, having observed that double taxation only applies in some cases and that lock-in effects seem relatively modest. Suffice it to say, not everyone agrees with Burman’s take.
The Committee for a Responsible Federal Budget’s Stabilize the Debt calculator gives you the option of eliminating the capital gains tax. One wonders how a reform that raised tax rates on ordinary income — say to Clinton-era levels — while eliminating or dramatically reducing capital income taxes would be received. This approach would certainly not address the concern that animates the Buffett Rule, i.e., that some small minority of high-earners derives most of its income from capital income. In a recent article in City Journal, Josh Barro explained the broad outlines of such an approach:
New York University professor David Bradford suggested a system called the “X tax,” in which both businesses and individuals would pay an income tax—but individuals, crucially, would pay no tax on interest, dividends, or capital gains. Since people can do only two things with their income—invest it or spend it—a government that taxes income without taxing capital is imposing the equivalent of a consumption tax. The businesses, meanwhile, would pay taxes on the revenue that they took in from customers—again, this would be a consumption tax—but subtract from their taxable income whatever they bought from other businesses, as well as what they paid their employees. Though its operation is significantly different, the base of the X tax is the same as that of a value-added tax (VAT). But unlike with a VAT, the government could levy tax at lower rates for lower-wage individual earners, introducing progressivity and potentially drawing some Democratic support to the plan.
Any of these reforms, of course, would bear a price, since the government would lose revenue by no longer double-taxing capital. To help make up for the gap, the top tax rate on individual wage income, for starters, would need to remain in the neighbourhood of today’s 35 percent rate, instead of the much lower rates envisioned in the Bowles-Simpson plan. But by eliminating various tax credits and deductions, such as the deductions for state and local taxes paid and for mortgage interest, the government could pay for reform and even afford to set lower rates for lower- and middle-income earners. Better still, it could increase the earned income tax credit, a benefit that the very lowest wage earners receive.
Because these reforms would reduce or even eliminate the taxes that investors pay on capital income, Warren Buffett’s tax bill would be smaller than it is today. Some other investors with extremely high incomes would likewise be better off. But the tax burden wouldn’t be shifted to the middle class and the poor. Rather, the brunt would be borne by wage earners in the top quintile—partners in law firms and corporate executives, for instance—who have labor income taxed in the top bracket and who tend to benefit heavily from tax deductions. [Emphasis added]
My crude impression is that wage earners in the top quintile are collectively more influential than investors with extremely high incomes, though presumably less influential as individuals. These HENRYs (“high earners, not rich yet”) are relatively large in number, politically active, and overrepresented among small dollar donors to both political parties. Rather than frame fights over the tax code as fights between the homogeneous rich and the homogeneous non-rich, or even as fights between narrow special interest groups, one wonders if there’s an element of HENRYs vs. the capital rich. And is it obvious that the non-rich should be allied with HENRYs and not the capital rich? If it really is true, contra Burman, that a lower tax burden on capital income is growth-enhancing and (not contra Burman, as I think he’d agree) that higher marginal tax rates on individual wage income wouldn’t be that bad, something like a Bradford X tax would advance the interests of the non-rich and the capital rich while squeezing HENRYs.
(There is a decent case to be made that HENRYs are the real villains of our politics — my sense is that they tend to be the most avid and effective proponents of opportunity-restricting measures like onerous land-use regulations and licensing restrictions, of tax expenditures like the mortgage interest deduction and the state and local tax deduction, etc. But this is all very subjective.)
Head Teacher (Photo credit: Mot)
Occasional chats with investors in education in Uganda, led my colleague Rachel Namutebi (a teacher by profession) and I to create a good governance manual in July 2011, that expanded the scope of administration of schools from a human resource manual to a good governance manual that also included updates in human resource management. Some of it’s contents are in line with leadership and behavioural management, terms and conditions of employment, professional conduct and standards, other policies and procedures and the appendices include aspects on corporate social responsibility, capacity building, staff motivation and retention and others. And to seamlessly incorporate the manual, we also offer training sessions as an on-going support system and honour specialised requests for legal work that is done separately from the governance quotient.
The initial receipt of the manual by the first purchasers alerted us to the fact that we were in an area that had not received as much coverage as the teachers’ strikes for more pay, school fires and all the other negative positions that seem to have our primary and secondary education sectors in a stronghold. The purchasers, enthusiasm led us to visit some more schools and at the publishing of this article, we have so far visited 20 schools to market the manual. Special thanks go to the Headmasters, Headmistresses and Directors who passed by our office at Ruth Towers to have a look at the blueprint.
The schools that gave us a good reception and some even went ahead to purchase the manual, ask for specialised work in line with capacity building, Board matters and teacher motivation and retention included my old Alma Mata Kings’ College Budo, City Parents School, Trinity College Nabbingo, Bunga primary School, Ndejje Senior School, Kitante Hill School, St. Lawrence- Horizon Campus, Aga Khan Education Service Uganda.
The poor receptions caught us off guard as we had expected a simple ‘ we will not be able to purchase your manual …(for whatever reason)’. For example; there was the headmaster at a school in Namugongo, with whom we had an appointment who on receiving the mandatory slip announcing our arrival, locked himself in his office until we left 30 minutes later. And the school along Gayaza road where the Headmistress was too busy to cancel our appointment and allocated us to the head of IT (information technology), whose brash words belittling our manual in favour of their strategic plan had us scampering for safety back to the confines of Ruth Towers. But the worst had to be an excursion into the depths of Nateete, through deeply eroded roads, where i worried that my car’s crank shaft might break, only to get to our appointment and the headmistress was not on the school premises and her mobile phone was off. On looking at the makeshift dustbin (a rusted wheel barrow with a hole in it) at the school gate, the clapboard classes and overgrown grass, we decided that the manual might be too expensive for the school at that time. As we were undeterred in our venture, we gave the headmistress a call two weeks later and invited her to Ruth towers whenever she was in Kampala to have a look at our product and her reply was we must make the journey back to her school as we were the ones selling (groundnuts anyone?!).
However, the poor reception had us agreeing that visiting each and every school in person was only to be achieved as a five year plan; and even then, the Ministry of Education and Sports would have registered more schools in line with the growing population and universal primary and secondary education. In getting the manual to the schools (private, government, bank balances in red or black), for monitoring and review, the ministry would do a better job than our ‘visit 1 school a week’ campaign.
3/4 of the schools we visited had some form of construction going on. The tight rope in paying Value Added Tax (VAT) on construction is a noose round the necks of some of the schools we visited. The rationale being that Schools are exempt from VAT but have to pay VAT on purchase of construction materials, labour and to the contractors and they can not claim it as they are not registered for VAT.
And this article written by Joshua Caucutt, a financial contributor for Money Crashers Personal Finance, published under the title below on the Forbes website on 5/02/2012 makes interesting debate. Imagine if there was no more Income tax, tax on second hand items (emivumba), our much loved tax deductions, tax was only on retail et cetera and the replacement was FairTax. Joshua Caucutt’s article is enlightening especially as the Uganda Pay As You Earn tax threshold was recently increased from 120,000Ushs to 235,000Ushs per month as per the Uganda budget speech read on 14th June 2012 by Honourable Maria Kiwanuka, the Minister of Finance, Planning and Economic development.
Is the fairTax the Best Solution to Tax reform?
Are you overwhelmed by the political discourse surrounding taxes, the debt ceiling, spending, revenue, and the Internal Revenue Service? Does the maze of income taxes, payroll taxes, deductions, and refunds make you want to tear your hair out every April? If you successfully navigate the maze of federal taxes, you still have to deal with state and local tax intricacies in order to avoid committing a tax error.
Even the most optimistic citizens recognize that our government’s revenue and spending system would benefit from major reform. Yes, the current United States tax codeis a great way to keep lawyers and tax accountants employed, and effectively supplies major corporations with enough loopholes to avoid a great deal of tax liability. However, for the rest of us, our current IRS tax code is incredibly complex, and perhaps unfair.
What is the best way to pay taxes while also simplifying them for the average citizen? There are many different proposals floating around: closing all loopholes, banning tax shelters, hunting down off-shore accounts, instituting progressive taxes, instituting regressive taxes, pay-go legislation, flat taxes, low taxes, no taxes, and a host of other ideas.
Obviously, every solution has positives and negatives, but there is one idea that is worthy of consideration by the population at large: the FairTax.
The FairTax is a tax on consumption. It abolishes income taxes and replaces that revenue with taxes collected every time an item or service is purchased.
The FairTax is not the “flat tax.” Many of us recall the 1996 presidential campaign mounted by Steve Forbes whose signature idea was the flat tax, meaning that all citizens with income would pay the same percentage. However, because the FairTax is dependent on consumption, an individual’s purchases, and not their income, would determine how much tax they pay.
If enacted, the FairTax proposal would completely change the federal income tax code from top to bottom. It is important to note that the FairTax comes with many dependent components where if one is taken away, the whole system might not work. Here are some of the most notable provisions:
FairTax advocates believe research shows that the FairTax would not result in greater deficits for the federal government. Instead, they suggest that federal revenues could increase under this system due to greater spending power, increased economic activity, and reduced ability to avoid taxation on the part of some of the wealthiest entities in our country.
Another strength of this system is the reduction of hidden taxes in the items we buy. Many economists estimate that nearly 20% of the final cost of a product comes from the various taxes generated at every stage of production. For example, under our current system, an appliance manufacturer has to pay taxes on all the raw materials and pre-assembled components before the finished product is sold to the consumer. Those costs are hidden in the price of the item. Under the FairTax, taxes would be paid only at the point of sale, thereby reducing the up-front cost of goods and services.
Are there weaknesses in this proposal? Certainly there are. One concern is whether or not revenues will keep up with current levels of federal spending. This is a valid concern, but one that is more likely due to federal spending levels and not federal revenue collection. Besides, the current federal system of revenue collection cannot keep up with federal spending as it is.
The FairTax might not be perfect, but, in my opinion, it is far more attractive to the average tax payer than our current system. What’s your take?
Joshua Caucutt is a financial contributor for Money Crashers Personal Finance. In addition to commentary about economic policy, Joshua frequently writes about strategies for saving money and investing for long-term wealth.
