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This Sounds Like a Dumb Idea: Cutting the 401(K) Deduction

By JLP | May 2, 2012

Okay, I know the NY Post is usually alarmist but I have heard about this idea before. The idea supposedly being kicked around is to limit the amount employees and employers can put towards the employee’s 401(k) to a maximum of $20,000 or 20% of income, whichever is smaller. The current amount is a maximum of $50,000. I hope this does not happen as it sounds like a dumb idea to me.

Why?

Shouldn’t we be ENCOURAGING people to save towards retirement? The new rule would affect my wife’s 401(k) drastically at a time when we really should be saving as much as we can.

It always makes me laugh when I hear “experts” talk about how much a certain action will bring in tax revenues. Things NEVER work the way politicians plan.

It’s not clear from the article what happens to the accounts at retirement as to whether or not the withdrawals would be taxed.

Thoughts?

Topics: 401(k), Retirement Planning | 65 Comments »


65 Responses to “This Sounds Like a Dumb Idea: Cutting the 401(K) Deduction”

  1. Jack Says:
    May 2nd, 2012 at 4:32 pm

    ?????

    The 2012 contribution limit is $17,000. Those over 50 can put in another $5,500. So the max the employee can put in is $22,500.

    Employer and employee contributions, however, can go up to $50,000, apparently.

    However, since so few people are in that area, I really don’t think this will matter one way or another.

    What WILL have an impact is the government’s not making such contributions tax deductible.

  2. Jack Says:
    May 2nd, 2012 at 4:35 pm

    Another proposal was this:

    Another proposal being discussed in Congress says all tax deductions on 401(k)s and IRAs to be replaced with an 18 percent credit. The credit, according to a proposal that has been endorsed by economist William Gale, would be placed directly in a person’s retirement account.

    I think that might encourage those in lower tax brackets (less than 18%) to save more.

  3. JLP Says:
    May 2nd, 2012 at 4:40 pm

    Between the company and our contributions, we put in over $30,000 into the 401(k) last year. So, the new rules would affect us. The government will eventually get its money from us when we retire. They’ll also screw us because they’ll say we have TOO MUCH SAVED and will tax or take away social security.

    I think it’s more sinister. I think the government does not want people having their own assets. They want people dependent on the government.

  4. BG Says:
    May 2nd, 2012 at 5:37 pm

    All tax loopholes should be eliminated, including 401k (and other retirement account loopholes). BTW: you have 100% (our better) dollar matching from your employer on 401k contributions?!?

  5. BG Says:
    May 2nd, 2012 at 5:46 pm

    Thats awesome if your employer has that

  6. JLP Says:
    May 2nd, 2012 at 6:22 pm

    BG,

    If contributions are taxable going in, do I get them tax free at retirement?

    My wife’s company contributes 75% up to 6%. The rest is from profit sharing.

  7. Jack Says:
    May 2nd, 2012 at 10:17 pm

    WE is the operative word there.

    The current $50k limit is for individuals, and I suspect the lower limit would also be for individuals. Leaving you well under the mark.

  8. Jack Says:
    May 2nd, 2012 at 10:23 pm

    > If contributions are taxable going in,
    > do I get them tax free at retirement?

    Not if you’re getting the 18% credit put in!

  9. BG Says:
    May 3rd, 2012 at 1:18 am

    The limit is being reduced from $50k, to $20k, which is still high enough to affect exactly 0% of the people I know. Sounds like an excellent idea to me, hope they find other government waste to eliminate.

    Having a 401k tax loophole doesn’t encourage more people to save, it is a handout (tax break) for the people who receive it (mostly employer contributions) at the expensive of higher taxes on everyone else to makeup the shortfall. Thats why I am against all exemptions/deductions/credits, regardless of how benign the loophole may seem.

  10. Bridget Says:
    May 3rd, 2012 at 8:04 am

    It might affect my family down the road. Our current employer matches 200% of our 401K contributions on 5% of our salary (so, we put in 5% of our salary, which effectively gives us 15% in the 401k). It’s a big reason my husband and I work for the company we do. I guess I would hope they’d move that limit up over time, to keep up with inflation.

  11. BG Says:
    May 3rd, 2012 at 10:12 am

    Bridget, that is an amazing match! I have a 100% match on the first 6%, still not too shabby.

  12. Jack Says:
    May 3rd, 2012 at 11:01 am

    I used to work for a company that put in 15% to the Profit Sharing Plan — whether you contributed anything or not.

  13. Bridget Says:
    May 3rd, 2012 at 12:00 pm

    BG. Yeah, for all stress our jobs cause us, that 200% is nice. :) Now if only that money would do some GROWING. I think our last statement said our personal rate of return was 1.2%. :(

  14. Jack Says:
    May 3rd, 2012 at 12:45 pm

    What are you invested in, Bridget?

  15. Bridget Says:
    May 3rd, 2012 at 2:46 pm

    Our 401Ks are administered through Wells Fargo. You can choose plans that have pre-defined asset distributions, based on your approximate retirement date. It is supposed to change allocations as you approach retirement to be more conservative.

    All of my 401K contributions are in their 2050 Model Portfolio. Which is:

    18% Small Cap Stock Fund
    13% Mid Cap Stock Fund
    28% Large Cap Stock Fund
    3% Other (<– Not sure what that's about.)
    35% International Stock Fund
    3% Not Defined (<– Not sure what that's about.)

    Started investing when I started working (about 5 years ago). Didn't know jack back then. Barely know more than jack today. Learning alot. I know our other investments haven't been doing so hot, either, so I try not to think about it too much and just wait for things to improve. (Other investments didn't start until about a year and a half ago.)

  16. kitty Says:
    May 3rd, 2012 at 3:21 pm

    This will affect many older people before the retirement, it will also affect many of you when you get older, earn more money and are allowed to save put more every year. Note that 22,000 limit for everyone over 50 is greater than 20,000 limit being proposed.

    This wouldn’t have affected me when I was younger. But now that I am 50, it’ll most certainly affect me:
    1. I am 52, so I am allowed to contribute 22,000.

    2. My employer matches 100% of the first 6%.

    3. When my employer froze pension plans a couple of years ago, it introduced “compensatory” company contribution for people on old pension plans. For those on the original defined benefit plan this compensatory contribution is 4%.

    So this would affect me a lot, but I would imagine it’ll likely many people over 50 which is the time when you can actually contribute more because of your higher salary and fewer other expenses. It will affect you when you are over 50.

  17. BG Says:
    May 3rd, 2012 at 6:30 pm

    kitty) I understand what you are saying. Nobody wants their favorite tax loophole closed, but, my question for you is: if the changes were implemented, when you reduce your savings rate? I doubt it…

    I hate tax loopholes, and especially tax loopholes that can only be maximized by the people who least need a tax break (50+ year olds with tremendous cash flow).

  18. Stacey Says:
    May 3rd, 2012 at 9:56 pm

    So why ever aim to achieve? Let’s all be underachieving, lazy dogs…That’s the “change” we’re being fed…

  19. Jack Says:
    May 4th, 2012 at 7:05 am

    Since the money is taxed on withdrawal, is it a “loophole”? Also, it is taxed as ordinary income, even though most of the earnings come through capital gains.

  20. BG Says:
    May 4th, 2012 at 8:00 am

    Stacey) It is hard to tell if your comment was directed at me…but if it was:I said I doubt that changing the 401k rules would affect peoples savings rates. It would just push some money from 401ks into other account types.

    Besides, we don’t need tax loopholes for high earners to entice poor people to be un-poor, lol. Why not tax everyone equally and the government gets out of the business of picking winners/losers?

    Jack) deferring taxes for 30+ years is definitely a loophole. Not to mention you can take some of that (some) of that money out taxfree in retirement as well (using other loopholes).

  21. Jack Says:
    May 4th, 2012 at 8:41 am

    What “loopholes” allow one to take 401(k) or IRA (non-Roth) money out tax-free?

  22. Beeg Says:
    May 4th, 2012 at 12:56 pm

    So BG, you are also in favor of everyone paying a flat tax on all income with no deductions? If you make $5 or $500 Million, everyone pays the same amount?

    I would support that. I vote for 9.9%. Shouldn’t give more to the govt then what we give to God.

  23. Beeg Says:
    May 4th, 2012 at 12:57 pm

    Realize that 50% of Americans pay little to 0 federal income taxes.

  24. BG Says:
    May 4th, 2012 at 5:16 pm

    Beeg) exactly, one flat rate for all types of income, no loopholes.

    Also, those 50% are shelling out 15% in payroll taxes..

    Jack) the future standard deduction and personal exemption loopholes. Not to mention the difference between todays highest marginal rate and the future 10%, etc (lower tax brackets).

  25. Jack Says:
    May 5th, 2012 at 8:39 am

    Well, that makes sense, BG.

    How ’bout we just have a National Sales Tax and NO income tax?

  26. Stacey Says:
    May 5th, 2012 at 11:41 am

    BG, no that comment was not directed at you, just my general sentiment about the situation.

    However, your “50% pay 15% in payroll taxes” is certainly untrue as not all are employed, thus no payroll taxes.

    Jack, a national sales tax would be so appealing but will never pass. At least finally savers/the elderly would have the carrot they deserve while those in a consumption mode would keep the engines of the economy going. Also, black market/cash businesses would loose some of their ability to shirk their tax responsibilities as they certainly are spending their cash on some things.

    BG, I wish I could feel as strongly as you do about these infamous tax loopholes. All I know is that we had to pay an extra $8k this year from AMT…I think we had already paid enough to cover the 50%’s use of government services for the year…soon Uncle Sam will start taking my organs…

  27. Stacey Says:
    May 5th, 2012 at 11:42 am

    Above: *lose* not loose!

  28. BG Says:
    May 5th, 2012 at 3:26 pm

    Stacey) I’m not following your comment about the employed…there are people who earn millions a year, yet are ‘unemployed’ so dont pay payroll taxes either.

    Anyhow, I’m for flat taxes with no loopholes, which means: if, today, you pay more than average, your taxes would be reduced. And people who pay less than average will see their taxes go up. That is what happens when something is finally made ‘fair’.

    BTW: those 50% who pay (only) the 15% payroll taxes: that is exactly the same tax rate as Mitt Romney. So across all income levels, there are people who pay significantly less than their peers.

  29. Jack Says:
    May 5th, 2012 at 7:29 pm

    They don’t get the benefits of those programs, either, BG.

  30. Stacey Says:
    May 6th, 2012 at 12:20 am

    RE: flat tax…For those who are “marginalized” they would get an upfront credit because the tax would be so unfair (regressive) to them…thus, we would still have peeps paying no tax. “Fair” will never happen. It’s an imperfect system in an imperfect world…

    I want the tax code to stop whacking people because their years of hard work and sacrifice finally made them more successful than 50% – 95% of the population.

  31. Jack Says:
    May 6th, 2012 at 8:18 am

    Define FAIR, Stacey, in generic terms please. Then explain how giving “marginalized” (which they usually did to themselves, BTW) people an upfront credit is “fair”.

  32. Stacey Says:
    May 6th, 2012 at 2:01 pm

    Jack, to be clear, I’m not in favor of the upfront credit espoused by the flat tax proponents, I was just commenting that there will always be citizens (or, in some cases “residents”) of our nation who do not pay any INCOME tax (that’s for you, BG!). But understandably, if people can’t afford food and shelter, they certainly are not in a position to be paying any tax, flat or not. Of course, years ago they should have pursued more education or training, lived in a less expensive part of the country, never bought that expensive car/house/big screen TV, married better or not married at all, not gotten ill, limited the number of kids they had, never picked up a cigarette, stayed away from drugs, gambling, name your vice, avoided the drunk driver, never fallen off the ladder, or whatever the case may be that has placed them in their current desperate situation.

    What is “fair?” Fair to me is a certain percentage of income, sliding scale like we have, but not jacked up at the higher ends to correct for loopholes. (We have taken the child tax credit one time–back when George W was in office, and even then it was only a partial credit.) I have the same expenses from raising a family as the family next door, but because we are educated and have made a good buck, we get the shaft.

    I guess I’m starting to see BG’s side…get rid of the child tax credits, college tuition credits and all the other nonsense and get to a bare bones tax return. This of course will never happen because of lobbyists, but the entire tax and social welfare system has become ridiculous. But somewhere along the line we need to start demanding self-reliance and personal savings.

    And yes, for some marginalized folks, they have done it to themselves. But there are other families that had two-working adults who have both lost their jobs due to factors beyone their control. I’m not heartless…People need to get on their feet, get more training, etc. The key is to make it a temporary setback, not a permanent one.

    Self-respect, education, self-control, ambition…these are some of the qualities we need to restore/instill in our country. And stop penalizing the people who have made better choices.

  33. Jack Says:
    May 6th, 2012 at 5:09 pm

    > What is “fair?” Fair to me is a certain
    > percentage of income

    NO. I said GENERAL — not specific to taxes, or economics, or anything else. Just a general definition of FAIR, such as “Everyone is treated exactly the same.”

    Try again.

  34. Jack Says:
    May 6th, 2012 at 5:11 pm

    > But there are other families that had two-working
    > adults who have both lost their jobs due to
    > factors beyone their control.

    That’s interesting. In my family alone I can count DOZENS of hard-working adults.

  35. Stacey Says:
    May 6th, 2012 at 5:17 pm

    Yeah, my family has dozens of hard-working people too as my husband is the oldest of 8 kids and both adults in each unit work…plus all the aunts, uncles, etc. What is your point on comment #34? Do you not comprehend that crap can happen to people and it takes time to find another job?

    PS Back to “fair”–everyone should contribute something to the common good, without undue hardship to anyone.

    What’s it mean to you?

  36. BG Says:
    May 6th, 2012 at 7:38 pm

    Stacey) Yep, you allow one loophole and before you know it, you have a wacky tax system like we have today…best to just forbid all loopholes, no exceptions. Personally, I don’t like the idea of progressive marginal tax brackets, but as long as there is the separate payroll tax system, it is only fair that income tax rates go up substantially after the $110k SS tax barrier…it helps flatten things out somewhat.

  37. Jack Says:
    May 6th, 2012 at 8:28 pm

    > Yeah, my family has dozens of hard-working people
    > too as my husband is the oldest of 8 kids and
    > both adults in each unit work…plus all the aunts,
    > uncles, etc.

    Great!

    > What is your point on comment #34?

    I think you just answered it yourself. But I will make it clear. Why should people be demanding money from strangers before asking their own families?

    > Back to “fair”–everyone should contribute
    > something to the common good, without undue
    > hardship to anyone.

    You are still in economics. More general, please.

    BTW, “contribute” means to GIVE. Taxes are TAKING.

    What does GOD ask? The same of EVERYONE.

  38. Stacey Says:
    May 6th, 2012 at 10:02 pm

    I think too many in our nation stopped being concerned about what God wants decades ago, Jack. Thus the death spiral of morals…

    But since we’re delving into religion here,
    Mark 12:17 Then Jesus said to them, “Give to Caesar what is Caesar’s and to God what is God’s.” And they were amazed at him.

    But your point is taken on the differentiation between “contribute” and “tax”. I used the wrong word in my post above.

    OK, “Fair” is for DC to empty itself out and we start over with looking to the Constitution of what government is supposed to do for its people.

  39. Jack Says:
    May 7th, 2012 at 7:04 am

    > we start over with looking to the Constitution of
    > what government is supposed to do for its people.

    Another interesting idea. The thing is, the U.S. government isn’t supposed to do ANYTHING for the PEOPLE — only for the STATES.

    And all these silly welfare programs we have to take care of people, the people can do themselves. People did not starve to death even in the Great Depression.

  40. Jack Says:
    May 7th, 2012 at 10:09 am

    And I already gave my definition of FAIR: “Everyone is treated the same.”

    For instance, my State has a Sales Tax. It applies to everyone whether rich or poor. In fact, there is no knowledge of rich or poor in the Sales Tax. That’s FAIR.

  41. BG Says:
    May 7th, 2012 at 11:18 am

    Yep, sales taxes are pretty fair: go with a VAT so the system is self enforcing (no online purchase loopholes, no import from out of country loopholes, etc).

    Heck, any system can be made fair as long as there is proper enforcement and no loopholes

  42. JLP Says:
    May 7th, 2012 at 11:29 am

    The ONLY way I would support dumping deductions is if we have a true flat tax. Otherwise, keep the deductions and allow those of us who pay the BULK of the taxes for the rest of country have some benefits. Don’t talk to me about fair when 50% of the population pays no federal income tax (and I’m not talking about social security).

  43. BG Says:
    May 7th, 2012 at 8:29 pm

    Lol, everyone loves _their_ loophole, and think everyone else should give up theirs. That is the environment that politicians love. How about a flat tax, no loopholes, everyone pays the same rate…it would be like turning on the light and watching the roaches (lobbyist) scatter. Then force a balanced budget amendment so the ONE flat tax rate is raised to cover actual government spending — then you get to sit back and watch EVERYONE raise h3ll with their congresscritters to cut spending so the ONE tax rate will be lowered.

    If 50% are exempt from income taxes, they won’t give a d$mn what the rate is on the other 50%. Likewise if high earners are (mostly) exempt from payroll taxes, they don’t give a d$mn what the payroll tax rates are.

    If we ALL shared the same pain, then we all would quickly come to agreement on how much taxes we are willing to bear (hence government services we are willing to do without).

  44. Jack Says:
    May 7th, 2012 at 9:31 pm

    I do not want the government in my business, so I oppose the income tax on that principle alone. It is not the government’s business how much money I make or how I make it. It is not the government’s business whether I am married, who I am married to, or how many children we have. It is not the government’s business what charities I contribute to.

    That is why I favor a national sales tax.

  45. BG Says:
    May 8th, 2012 at 7:05 am

    Jack) So, instead, it is the government’s businesses how you spend your money?

    BTW: the points you listed are all for the income tax loopholes. Don’t want ‘them’ to know who you are married to? File ‘single’ and pay more. Don’t want them to know how many kids you have? Don’t claim them on your return and pay more. Don’t want them to know what charities you contribute to? Then don’t itemize them on your tax form and pay more…

  46. Jack Says:
    May 8th, 2012 at 10:46 am

    But, BG, they won’t know it’s ME spending that money.

  47. BG Says:
    May 8th, 2012 at 4:09 pm

    touche :)

  48. Valkyrie Frost Says:
    May 8th, 2012 at 4:34 pm

    As with most good ideas, the flat tax and the fair tax (two very different taxing methods) have no traction in Wash., D.C. by the simple fact that our politicians use the tax code to enlist both votes and campaign contributions. Thus, true tax reform is a non-starter in the Federal Govt.

  49. Valkyrie Frost Says:
    May 8th, 2012 at 5:00 pm

    Using a flat sales tax (for both national and states ) is the most efficient form of taxing while providing the most equitable form of taxing. No income taxes at all including the payroll taxes. All of them gone.

    I’ll add an extra idea to the flat sales tax model that can help the poor and give an incentive to keeping honest people honest.

    No tax on food, as in food from a grocery store. Restaurant food is a service and is taxable.

    This would give the poor a break as the most costly item in a low bracket budget is food.

    It is a loophole of sorts, but it’s a “fair” loophole as it applies to everyone equally as everyone must have food. (That should make Jack happy, too.)

    The down side to this type of tax is that people will find ways to avoid paying sales tax. Like using cash and not using the cash register to document a sale (this is popular in Greece). That is where enforcement comes into play. The IRS will still have plenty of work, but as most states already employ a sales tax and enforcement, the task should be a straight forward one.

    On the other side, the wealthy will pay more tax as they tend to buy pricey items, like designer clothing and new cars every year or two.

  50. Valkyrie Frost Says:
    May 8th, 2012 at 5:05 pm

    The VAT system is an attractive (seductive even) system. It builds tax into every step of a product or service as it marches towards the final consumer.

    The dark side of VAT is the accounting overhead makes VAT much more difficult to implement, track and enforce. That means more CPA’s, which could be a good thing in the long run.

  51. Valkyrie Frost Says:
    May 8th, 2012 at 5:11 pm

    Interesting no one has mentioned Herman Cain’s 999 plan. Personally, I dislike the plan do to it’s adding a national sales tax while retaining both personal and corporate income taxes.

    As corporate taxes are simply paid by consumers in the form of higher prices, corporate tax comes off as stupid.

    As both income taxes are inbred with loopholes making then very unfair and unequal to all parties, I’d like to see both repealed. Mr Cain does not seem to understand that aspect of taxation.

  52. BG Says:
    May 8th, 2012 at 5:43 pm

    Valkyrie) I prefer the VAT because it pushes the enforcement onto the businesses in the supply chain. All businesses pay the full VAT on incoming goods, and they get a refund on the outgoing goods.

    If you purchase goods from a supplier that didn’t pay the VAT, then you get no refund on your VAT. Thats a huge incentive to not use that cheating supplier ever again. The cheating supplier is stealing from the next guy in the supply chain, not the government.

  53. Jack Says:
    May 8th, 2012 at 8:19 pm

    > If you purchase goods from a supplier that didn’t
    > pay the VAT, then you get no refund on your VAT.

    Uh, no.

    The purchaser does not know whether the seller paid the VAT or not. The purchaser only knows what HE paid, and deducts that amount from what he collects on his sales before remitting it to the government.

  54. BG Says:
    May 8th, 2012 at 9:25 pm

    Sorry, but no. The purchaser pays the seller for the goods, plus the VAT. It is the _seller_ that is supposed to forward the VAT taxes to the government (minus his VAT on his incoming goods). If the seller did not forward the taxes to the government, then the purchaser (if also a supplier in the chain, otherwise they are a consumer) is refused his _refund_ on VAT paid, because in fact, the VAT was not paid.

    Clear as mud?

    The VAT has a pay first, refund later model. The model is elegant for two main reasons: businesses can be both suppliers AND consumers. For any goods they purchase and not resale, they are the consumer and eat the total value of the VAT sales tax (exactly like a private consumer). This prevents the loophole where we, today, allow companies to completely writeoff consumption purchases (like private jets).

    Secondly, if you are in the supply chain, it is in your interest to only deal with honest business that actually remit the VAT (like I mentioned) so you can get the VAT refund as the goods roll through the supply chain.

    It is the governments job to double check that the VAT was actually paid by the tax ID that you _claim_ you paid…if the numbers dont add up, the chain is broken and you eat the full cost of the VAT (because your refund is denied) – effectively making you a consumer since it knocks _you_ out of the supply chain.

    If any cheating goes on, the government gets at least partial taxes on the goods in the economy. Whereas on a strictly sales tax model (like we have in most states), a cheating retailer can simply not remit the collected sales taxes, the government gets Nothing (not a single penny), enforcement is d@mn near impossible, and no one is the wiser until after an audit.

  55. Jack Says:
    May 9th, 2012 at 11:09 am

    I disagree, BG. The purchaser’s receipt says he paid the VAT when he made the purchase. He deducts that amount from what he remits to the government from his sales.

    If the supplier did not remit the VAT to the government, that is between those two only.

  56. BG Says:
    May 9th, 2012 at 1:54 pm

    Who says you aren’t the cheat trying to extract money from The Revenue, as people on the other side of the pond call their Treasury. There are known VAT scams where people file bogus VAT refunds on their fictitious outgoing goods. Google it.

  57. Jack Says:
    May 9th, 2012 at 2:25 pm

    Stay on target, BG. We’re only talking about how it works. A company submits the receipts detailing how much VAT it paid on purchases of goods going into manufacture, and that amount is deducted from the VAT owed on their sales.

    The government does not require companies to pay the entire VAT on its sales and then refund some of the money as that company’s suppliers send in their VAT money. Do you really think the government tracks the purchases, and only refunds the tax for those purchases when the VAT comes in for it?

  58. BG Says:
    May 9th, 2012 at 4:59 pm

    Jack) The system is “Buyer Beware”, and the buyers of goods are extremely encouraged to first validate the VAT ID number of the seller before paying the VAT to the seller. There are governmental websites dedicated to validating seller’s VAT ID numbers.

    If a seller’s VAT ID number is not valid, then the buyer can refuse to pay the VAT and the seller has 90 days to obtain a valid VAT ID number and invoice the purchaser for the unpaid VAT.

    If you are dumb and pay a ‘cheating’ seller the VAT before validating their ID number: then it is the BUYER that is screwed and the government will come after the buyer for “cheating the public revenues” for filing fraudulent VAT refund paperwork.

    Obviously you haven’t done your homework.

    Citation: http://www.bytestart.co.uk/checking-to-see-if-a-vat-registration-number-is-valid.html

    “The certificate will provide valuable evidence to show that you acted in good faith should HMRC challenge input tax recovery or seek payment of lost VAT.”

  59. BG Says:
    May 9th, 2012 at 5:56 pm

    I should mention that sellers who ‘zero-rate’, meaning they are exporting goods which are sold VAT free (typically to a business in another VAT country), are strongly encouraged to validate the VAT ID number of the purchaser.

    Either way: it is the party that wants to claim a REFUND of the VAT (by deducting the amount of VAT already paid on the incoming goods), to have good documentation proving that the VAT was, in fact, actually paid.

    So: businesses in the middle (or end) of a supply chain have a strong incentive to only deal with legit VAT-paying suppliers.

    Businesses that export out of the country have a strong incentive to “vet” their customers to ensure that the customer is truly allowed to purchase the goods VAT free.

  60. Jack Says:
    May 9th, 2012 at 7:55 pm

    It is not a REFUND, BG, but a DEDUCTION.

    Let’s say the VAT is 10%. If a company pays £100 in VAT on a £1000 purchase, then sells that item for £1200, it does not remit £120 to the government and then submit the receipt to get the government to REFUND the £100. Rather, the company DEDUCTS the £100 it already paid, and remits £20.

    If the government conducts an audit and it turns out that the receipt is invalid (because the seller was a fraud), then the deduction is rejected and the purchaser must remit the missing £100.

  61. BG Says:
    May 10th, 2012 at 7:56 am

    Same difference. Taxes were already paid on the incoming goods. If you want that money refunded, then the new seller must have proper paperwork showing they did their due diligence vetting that the supplier was not a cheat. Without that proof, you cannot deduct incoming VAT paid when remitting the buyers VAT paid.

    Anyhow my point is clear: the system is self enforcing because every business in the supply chain has a strong incentive to ensure everyone else they deal with is honest.

    This horse is dead, no point bearing it anymore.

  62. BG Says:
    May 10th, 2012 at 7:57 am

    …beating it anymore. Swype loves picking the wrong word when typing this out on my phone.

  63. Jack Says:
    May 10th, 2012 at 7:06 pm

    Nice try, BG, but the r is on the 7, and the t is on the 8. ;-)

  64. BG Says:
    May 10th, 2012 at 8:38 pm

    Swype, google it.

  65. Jack Says:
    May 11th, 2012 at 7:23 am

    User error, either way!

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