Payback TimeMany See the VAT Option as a Cure for Deficits

The value added tax (VAT) has been around for decades in other countries. It is predicated on the  idea that ALL people should share in the cost of government. The way it works (see below) is that the government picks up 10% (for example) of each stepof the production and sales process. It is normally reserved for hard goods instead of services.

I think that is is the only good idea around topay down the deficit IF it is applied to Wall Street. In addition to raising money it would force all intermediaries to report every transaction and their profit on it. It would force them todeclare the profit (VAT) and pay the income taxes from the fees and profits.

Let’s look at the way this would work in the derivative market. Better yet let’s look at the derivative market over the last 10 years. Maybe you’ll fee outrage when you read this somewhat over simplified version of the way things REALLY work. 

  1. Mortgage Bonds are sold  to investors by a “seller.” Who gets the selling fee? How much was it? Where did it go? Even under current rules most of this money went untaxed for income tax because by playing the shell game cleverly you can create a question of tax jurisdiction and end up paying no tax and  not even reporting it.
  2. The Seller of the mortgage bonds (and a percentage interest in the underlying notes and mortgages) received a stack of certificates from the Special Purpose Vehicle (SPV/Trust)at a cost of  less than what the certificates were sold for. The great thing for the seller is that the Selling Agent is allowed to “sell forward” to investors, thus knowing exactly6 what his profit is going to be when he takes the stack of bond certificates. The VAT tax would apply here and perhaps result, heaven forbid, in a double tax of VAT and income taxes. Criminal law enforcement could beeefed up on the VAT so that the intermediary parties in the securitization chain have nowhere to hide — if the government does its job in enforcement which would mean training special VAT agents who can understand the workings of securities transfers on Wall Street and can enforce the jurisdicitional issue thaty has been the favorite tool of investment banks working both sides of the Atlantic and Pacific.
  3. The SPV has received an assignment (of dubious legality) from an aggregator pool. It is paying a huge premium over the true value fhe pool, and thus, so are the investors who buy the bonds. In the presence of a government doing its job to enforce tax liability —VAT and Income Tax — the fraud of the entire mortgage meltdown wouldhave been exposed, the government would have taken possession of the investment banks running these pools, and taxpayers would have received in their coffers huge amounts of money paid in taxes from this yield spread premium. But alas,Wall Street continues to get its way and this is considered no a profit or a fee but instead it is either not shown at all as this yield spread profit from sale of ggregator to SPV or it is actually shown as an expense. On an average basis the YSP on the sale from aggregator to SPV was about 80% of the mortgage funding amount. This is where the toxicity of the mortgages and notes was hidden.
  4. And then you continue down the line with the usual undisclosed YSP between mortgage broker and”lender” (actually a straw man through whom the transaction passes etc.

If you put pencil to paper you’ll see that Wall Street didn’t  just dodge responsibility for the mess they created, they dodged the taxes too. If the government was enforcing our existing tax laws through this process, the entire stimulus and other lines of credit from the Federal government would have been paid by the culprits who did this to us.

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December 11, 2009 Payback TimeMany See the VAT Option as a Cure for Deficits By CATHERINE RAMPELL Runaway federal deficits have thrust a politically unsavory savior into the spotlight: a nationwide tax on goods and services. Members of Congress, like their constituents, are squeamish about such ideas, instead suggesting spending cuts or higher taxes on the rich. But with a lack of political will to do the former, and a practical ceiling to how much revenue can be milked from the latter, economists across the political spectrum say a consumption tax may be inevitable once the economy fully recovers. “We have to start paying our bills eventually,” said Charles E. McLure, a tax economist who worked in the Reagan administration. “This strikes me as the best and most obvious way of doing it.” The favored route of economists is known as a value-added tax, which is a tax on goods and services that is collected at every step along the production chain, from raw material to a consumer’s shopping bag. Similar to a sales tax, it generally results in consumers paying more for the things they buy. The revenues could be used to pay for health care or other social programs, or just to pay down existing debt. Like universal health care, every other industrialized country in the world already has a value-added tax (as do about 100 emerging countries). And also like universal health care, this once-taboo policy option has recently been invoked, at times begrudgingly, by many prominent Washingtonians, including the House speaker, Nancy Pelosi; John Podesta, who was co-chairman of President Obama’s transition team; and two former Federal Reserve chairmen, Alan Greenspan and Paul A. Volcker Introducing such a tax would probably require an overhaul of the entire federal tax code, no small order, and something the government last did in 1986. At the time the goal was to simplify the tax system, to raise money more efficiently and with fewer headaches for taxpayers. Since then, federal spending has ballooned, while the government’s ability to raise taxes has become increasingly inefficient. Consider the page length of the tax code and tax regulations, which has expanded by more than 70 percent, according to Thomson Reuters Tax and Accounting. (There are more words crammed onto each page, too.) The tax system is now a compendium of lobbied-for ifs, ands and buts. As the tax code has been embellished and then Swiss-cheesed, the portion of Americans footing the nation’s income tax bill has shrunk. “There are many more deductions and credits, which can often encourage inefficient behavior such as tax shelters,” said Leonard E. Burman, a public affairs professor at Syracuse University, about the changes to the tax system since the 1986 reform. “The ideal tax system has a broad base — few deductions or exemptions — and low rates.” Most of the rest of the industrialized world — including, most recently, Australia — has already taken this lesson to heart by imposing value-added taxes. Unlike income taxes, which are often front-loaded on the rich, then subsequently diluted, a value-added tax is paid by almost everybody. That broad base is one of its major advantages, and why the International Monetary Fund frequently recommends it to countries that need to raise money quickly. What is good for economic purposes, however, can be bad politics, especially since Mr. Obama pledged not to raise taxes on the bottom 95 percent of Americans. (And many Republicans have pledged not to raise taxes on the bottom 100 percent of Americans.) The value-added tax is also the darling of many economists for its bounce-a-quarter-off-its-abs efficiency. Its administrative costs to the government are generally low. It is also considered less of a drag on the economy over the long run than raising income taxes, which discourage people from saving money and thereby making capital available to businesses. To understand why a value-added tax is considered so efficient, you have to understand how it usually works. Imagine the production of a new dress, in three steps: ¶A fabric store sells a tailor enough silk to make one dress, at a total price of $10 before taxes; ¶The tailor sews a dress and sells it to Macy’s for $30 before taxes; ¶Macy’s then sells the dress to a shopper for $50, before taxes. Let’s say the value-added tax is 10 percent. The government will collect some tax revenue in each step of the production process, from roll of fabric to cocktail-party scene-stealer, but each business in the chain gets credit for the tax already paid by other suppliers. When selling the cloth to the tailor, the fabric store adds a tax of 10 percent, or $1 on the $10 of supplies the tailor purchases. The tailor pays the fabric store $11, and the store remits $1 to the government. When the tailor sells his dress to Macy’s, he calculates the value-added tax as $3, or 10 percent of his $30 pretax price. Macy’s pays the tailor $33. But instead of sending the full $3 to the government, the tailor gets to subtract the $1 of taxes he had already paid to the fabric store. So he sends $2 to the government. When Macy’s sells the dress to a shopper, it adds another 10 percent, so the shopper pays $55, or $50 plus $5 in tax. That would be in addition to any state or local sales taxes consumers have to pay, depending on the locale. Macy’s checks to see how much the previous companies in the supply chain — the fabric store and the tailor — have already paid the government in value-added taxes, and subtracts that from the $5. Macy’s ends up remitting just $2 to the government. The government receives $5 total, or 10 percent of the final purchase price, but from three different businesses. Although more complicated, value-added taxes are considered better than equivalent sales taxes — where the tax is levied only when the consumer buys a product — for two main reasons. First, if a single business evades the value-added tax, the government does not lose a large portion of money, because it will collect taxes at other stages of production. Since companies usually get credit for taxes already paid by their suppliers, companies will pressure other businesses in the production chain to prove they paid their taxes. That means the system is somewhat self-policing. To some foes of big government, though, the efficiency of the tax is also its fatal flaw. Conservatives worry that it enables the government to raise money with such little effort that it will encourage Washington to spend even more. On the other hand, liberals are wary of value-added taxes because they are regressive. Poor people spend a higher portion of their income buying things than the rich, meaning lower-income people would be disproportionately hurt. That is why countries often make other major changes to their tax code at the same time. In Australia, the government imposed a value-added tax in the middle of an overhaul of the system in 2000, which included making the income tax system more progressive. “Many countries with VATs have income taxes that start out at higher income thresholds,” said James Poterba, an economics professor at M.I.T. Combining a broad-based VAT with a steeply progressive income tax, he said, avoids affecting the poor too much. But just as the income tax has been hollowed out by countless loopholes, so could a value-added tax. Many European countries, for example, have counteracted the regressive qualities of the tax by exempting broad categories of goods, like groceries and children’s clothing. This always creates problems, economists say. Companies are tempted to mislabel their products so they can avoid the tax. “What really is the difference between prepared food versus nonprepared food?” said Alan J. Auerbach, an economics professor at the University of California, Berkeley. “You start having to split hairs, and that can become quite complicated.” Besides cheating the government of revenue, this sort of behavior also distorts what people choose to buy, causing a drag on economic development, Mr. Auerbach said. Moreover, in some industries — like financial services — it is difficult to evaluate how much value is added because of the way they make their money. The solution in many places, like New Zealand, is to exempt the financial services industry. But that might not go over well in a country whose federal debt has recently swelled precisely because of a major banking crisis. Such political hurdles, along with a still-tentative economic recovery, make a consumption tax — or a tax increase of any kind — unlikely in the immediate future. But with economists like Kenneth Rogoff of Harvard predicting that federal tax revenues will need to rise by 20 to 30 percent in the next few years, politicians may hold their noses and decide this tax is the least worst option. “Of course, we want to take down the health care cost, that’s one part of it,” Ms. Pelosi told Charlie Rose of PBS. “But in the scheme of things, I think it’s fair to look at a value-added tax as well.” Kitty Bennett contributed reporting.

7 Responses

  1. […] payback-timemany-see-the-vat-option-as-a-cure-for-deficits […]

  2. Check this out if you are in court or going. I found this information right on my Counties website.
    The Michigan Judges Retirement Plan is featured in the Counties comprehensive annual financial report.
    This also includes the Govenor and the attorney general. He is the lead counsel getting paid a fee to advise the fund.
    They are all heavily invested in the Banks that we are fighting and some of these banks are even getting a commission because they have been hired to invest for the fund. The example below came from the actual annual report.
    INVESTMENT SECTION
    72 • MICHIGAN JUDGES’ RETIREMENT SYSTEM
    Schedule of Investment Commissions
    Actual Estimated Estimated
    Actual Number of Average Trade Research Estimated Estimated
    Commissions Shares Commission Costs Costs Trade Research
    Paid 1 Traded 1 Per Share Per Share Per Share Costs Costs
    Investment Brokerage Firms:
    Banc of America Securities LLC 2,168 $ 72,280 0.03 $ 0.01 $ 0.02 $ 723 $ 1,446 $
    Bear, Stearns & Co Inc. 5,006 269,322 0.02 0.01 0.01 2,693 2,693
    Broadcort Capital 453 15,101 0.03 0.01 0.02 151 302
    Cantor Fitzgerald & Co. 1,720 86,172 0.02 0.01 0.01 862 862
    Citigroup Global Markets Inc. 8,270 409,484 0.02 0.01 0.01 4,095 4,095
    Cowen & Co., LLC 2,326 77,542 0.03 0.01 0.02 775 1,551
    Credit Suisse Securities LLC 4,706 194,801 0.02 0.01 0.01 1,948 1,948
    Deutsche Bank – Alex Brown 11 268 0.04 0.01 0.03 3 8
    Deutsche Bank Securities Inc. 1,287 44,617 0.03 0.01 0.02 446 892
    Goldman, Sachs & Co 4,054 177,833 0.02 0.01 0.01 1,778 1,778
    The Griswold Company, Incorporated 2,934 150,291 0.02 0.01 0.01 1,503 1,503
    ISI Capital LLC 2,475 82,482 0.03 0.01 0.02 825 1,650
    J P Morgan Securities Inc. 3,404 114,045 0.03 0.01 0.02 1,141 2,281
    Ladenburg Thalman 384 12,797 0.03 0.01 0.02 128 256
    Leerink Swann & Company 3 72 0.04 0.01 0.03 1 2
    Lehman Brothers Inc. 2,804 95,197 0.03 0.01 0.02 952 1,904
    Liquidnet Inc. 1 41 0.02 0.01 0.01 – –
    Merrill Lynch,Pierce,Fenner & Smith, Incorporated 5,395 184,833 0.03 0.01 0.02 1,848 3,697
    Mischler Financial Group, Inc. 385 12,841 0.03 0.01 0.02 129 257
    Morgan Stanley & Co. Incorporated 1,476 57,526 0.03 0.01 0.02 575 1,150
    OTA LLC 559 18,631 0.03 0.01 0.02 186 373
    Punk, Ziegel & Company 391 13,028 0.03 0.01 0.02 130 261
    Sanford C. Bernstein & Co., LLC 5,181 176,616 0.03 0.01 0.02 1,766 3,532
    Stanford Group Co. 294 11,513 0.03 0.01 0.02 115 230
    Thomas Weisel Partners LLC 447 11,339 0.04 0.01 0.03 113 340
    UBS Securities LLC 2,863 95,470 0.03 0.01 0.02 955 1,909
    Wayne Company 534 17,807 0.03 0.01 0.02 178 356
    Weeden & Co. L.P. 2,271 229,871 0.01 0.01 – 2,299 –
    Total 61,802 $ 2,631,820 0.03 $ 2 0.01 $ 0.02 $ 26,318 $ 35,276 $
    1 Commissions are included in purchase and sale prices of investments. The commissions and shares represent the
    System’s pro-rata share based on ownership of commission and share transactions in the investment pools.
    2 The average commission per share for all brokerage firms.
    Fiscal Year Ended September 30, 2008
    INVESTMENT SECTION
    70 • MICHIGAN JUDGES’ RETIREMENT SYSTEM
    Largest Assets Held
    Rank Shares Stocks Market Value
    1 47,732 SPDR Trust 5,536,379 $
    2 131,013 Microsoft Corporation 3,496,746
    3 42,226 Exxon Mobil Corporation 3,279,283
    4 39,477 Johnson and Johnson 2,734,984
    5 84,551 General Electric Corporation 2,156,039
    6 102,046 Pfizer Inc 1,881,736
    7 80,167 Cisco Systems Inc 1,808,558
    8 21,622 Chevron Corporation 1,783,391
    9 3,656 Google Inc 1,464,361
    10 66,719 Oracle Corporation 1,355,068
    Rank Par Amount Description Market Value
    1 1,205,027 $ General Electric Cap Corp 2.97438% FRN Due 2-15-2017 1,096,156 $
    2 1,003,468 Berkshire Hathaway Fin 5.11875% FRN Due 1-11-2011 1,002,141
    3 752,601 John Deere Capital Corp 3.26063% FRN Due 2-26-2010 752,431
    4 752,601 American Honda Finance 3.01% FRN Due 11-20-2009 749,485
    5 752,601 JP Morgan Chase & Co 3.70375% FRN Due 9-21-2012 746,622
    6 752,601 Vulcan Materials 4.06875% FRN Due 12-15-2010 745,586
    7 752,601 Citigroup Funding Inc 4.30875% FRN Due 10-22-2009 720,254
    8 576,994 American Honda Finance 3.265% FRN Due 6-07-2010 575,904
    9 501,734 John Deere Capital Corp 5.2025% FRN Due 1-18-2011 501,612
    10 501,734 Barclays Bank PLC 5.13875% FRN Due 1-11-2011 501,450
    Largest Bond Holdings are exclusive of securities lending collateral.
    * A complete list of holdings is available from the Michigan Department of Treasury.
    The System’s investments are commingled in various pooled accounts. Amounts, par value and number
    of shares represents the System’s pro-rata share based on its ownership of the investment pools.
    Largest Stock Holdings (By Market Value)*
    September 30, 2008
    Largest Bond Holdings (By Market Value)*
    September 30, 2008

    STATISTICAL SECTION
    MICHIGAN JUDGES’ RETIREMENT SYSTEM • 97
    Schedule of Participating Employers through 9/30/08
    Elected Offices
    Supreme Court
    Court Of Appeals
    02nd Circuit Court
    03rd Circuit Court
    04th Circuit Court
    05th Circuit Court
    06th Circuit Court
    07th Circuit Court
    08th Circuit Court
    09th Circuit Court
    10th Circuit Court
    12th Circuit Court
    13th Circuit Court
    14th Circuit Court
    15th Circuit Court
    16th Circuit Court
    17th Circuit Court
    18th Circuit Court
    20th Circuit Court
    21st Circuit Court
    22nd Circuit Court
    24th Circuit Court
    25th Circuit Court
    26th Circuit Court
    27th Circuit Court
    30th Circuit Court
    31st Circuit Court
    32nd Circuit Court
    34th Circuit Court
    35th Circuit Court
    36th Circuit Court
    37th Circuit Court
    38th Circuit Court
    39th Circuit Court
    40th Circuit Court
    41st Circuit Court
    42nd Circuit Court
    46th Circuit Court
    56th Circuit Court
    57th Circuit Court
    03B District Court
    05th District Court
    07th District Court
    08th District Court
    10th District Court
    14th District Court
    15th District Court
    16th District Court
    17th District Court
    18th District Court
    19th District Court
    21st District Court
    22nd District Court
    25th District Court
    26th District Court
    28th District Court
    31st District Court
    33rd District Court
    36th District Court
    37th District Court
    39th District Court
    40A District Court
    41B District Court
    42nd District Court
    43rd District Court
    44th District Court
    45th District Court
    46th District Court
    48th District Court
    51st District Court
    52nd District Court
    54B District Court
    56A District Court
    57th District Court
    58th District Court
    60th District Court
    61st District Court
    63rd District Court
    64B District Court
    65A District Court
    66th District Court
    67th District Court
    68th District Court
    70th District Court
    71st District Court
    73rd District Court
    74th District Court
    76th District Court
    77th District Court
    78th District Court
    80th District Court
    STATISTICAL SECTION
    98 • MICHIGAN JUDGES’ RETIREMENT SYSTEM
    Schedule of Participating Employers through 9/30/08 (continued)
    81st District Court
    82nd District Court
    84th District Court
    85th District Court
    86th District Court
    87th District Court
    88th District Court
    90th District Court
    91st District Court
    93rd District Court
    95th District Court
    97th District Court
    98th District Court
    Baraga County Probate Court
    Bay County Probate Court
    Benzie County Probate Court
    Berrien County Probate Court
    Branch County Probate Court
    Calhoun County Probate Court
    Cass County Probate Court
    Chippewa County Probate Court
    Clare County Probate Court
    Emmet County Probate Court
    Gogebic County Probate Court
    Huron County Probate Court
    Iosco County Probate Court
    Iron County Probate Court
    Isabella County Probate Court
    Kalamazoo County Probate Court
    Kent County Probate Court
    Lake County Probate Court
    Leelanau County Probate Court
    Mackinac County Probate Court
    Macomb County Probate Court
    Mason County Probate Court
    Mecosta/Osceola Probate District 18
    Monroe County Probate Court
    Montmorency County Probate Court
    Muskegon County Probate Court
    Ontonagon County Probate Court
    Oscoda County Probate Court
    Ottawa County Probate Court
    Recorders Court
    Sanilac County Probate Court
    Shiawassee County Probate Court
    St Joseph County Probate Court
    Washtenaw County Probate Court
    Wayne County Probate Court
    Wexford County Probate Court
    MICHIGAN JUDGES’ RETIREMENT SYSTEM • 99

  3. Tax, tax and more tax and even talking about any possible solutions coming from the fed is all backwards. The fed prints money for profit, like all private companies do, profit, not to benefit the clients the tax payers. Some day we will wake up and just educate people, politicians about how money comes in to being. Abolish the fed go back to gold and again educate people about economics. The fed and political rhetoric will just continue to feed the dragon. On another subject; We are looking for people who want to join a Wells Fargo class action law suit and anyone who just needs help with foreclosure in CA, FL, NY, CT and ID. Call Robert 860-599-5557

  4. To John George,

    I don’t see the disorder or confusion you refer to, especially when there is so much substance.

    Did you mean disconcerting in another way?

  5. Dear Editor:

    Yor message is great – lots of well thought out issues with lingering questions – but, please, please, use your “spell check with grammar” before uploading – it is very disconcerting when your posts are not written correctly.
    Thanks.

  6. Unfortunately, a VAT would harm businesses that
    actually manufacture things of value. It is very unwieldy
    and hard to keep up with.
    I know several Frenchman who owned factories
    in France and they hated it. To get away from it, they
    moved their factories to Viet Nam where the tax laws
    are much more favorable.
    If we tried this in the USA, it would be a total job
    killer and cause even more jobs to move to Asia
    and Mexico.
    Glass Steigel would probably solve the problem by
    separating commercial banking from investment banking and then enforce the income tax laws we already have. The VAT would be way too complicated,
    (but this is only my humble opinion, I’m not a tax expert).

  7. “I think that is is the only good idea around topay down the deficit IF it is applied to Wall Street.”

    – That is one gigantic IF. Most likely, with the financial services industry controlling our government(s) and our President, we’ll all get stuck with a more costly VAT and Wall Street will be exempted, as usual.

    Congress would sell this as “we are ALL going to pay our fair share” – but then quietly exempt Wall Street and specifically derivatives in the final conference committee bill some night at 2:30 AM.

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