Obama suggests value-added tax may be an option

[Martinus]

Okay then. Please explain it to me.

Businesses only pay the difference between the VAT they earn and the VAT they pay themselves.

This.

Imagine the manufacturer "A" sells the good "X" at a base price of $10 (with 10% VAT) to B. The total price is therefore $11. A issues an invoice to B which states that (i.e. gives the VAT amount and the base price) and, having collected the price, pays $1 to the state treasury (as VAT).

Now, imagine B goes on to resell the good "X" to C at a base price of $20. He charges the 10% VAT, which brings the total price to $22. He issues an invoice to C which states that, and having collected the price, should pay $2 to the state treasury (as VAT). However, from that amount he is able to deduct the $1 of VAT that was charged on the "input" good - therefore he only pays $1.

The effect is that B makes the full $10 on the resale and there is no compounding effect. (In practice, B has to take all his incoming invoices and outgoing invoices each month or each quarter - depending on which tax-reporting scheme he is using - and calculate all the incoming VAT and outgoing VAT and only pay - or recover - the difference). (For the record, since this is Languish, and people are deliberately dumb - obviously you don't need to match the in-VAT and out-VAT for the same good or service in the same month - you have 3 years to do so).

The same rule applies if B would use the good "X" as any sort of "input" for creating another good and then sold this new good (the input is understood broadly - for example, since I am not an employee but operate as an independent consultant, I charge VAT on my services to the lawfirm I work with - this means I can deduct VAT on any purchases I do that can be seen as contributing to my work performance, such as a mobile phone or a laptop) he would be able to deduct from the VAT he would have to pay to the state treasury any VAT paid on the input good(s) by whoever sold him that good.

Only if B didn't "add any value" (hence the name of "VAT") and simply consumed the good without generating any good or service he would then sell, he would not be able to recover any VAT.

I know this sounds complicated, but the obvious advantage over a classic sales tax where you collect the tax only once, at the moment the good goes to the end user ,is that with the VAT system you don't need to make up your mind when you sell or purchase the good as to whether the buyer is going to be an enduser. Plus the state gets the money earlier, which I guess is good for them.

[Jaron]

Okay then. Please explain it to me.

Businesses only pay the difference between the VAT they earn and the VAT they pay themselves.

This.

Imagine the manufacturer "A" sells the good "X" at a base price of $10 (with 10% VAT) to B. The total price is therefore $11. A issues an invoice to B which states that (i.e. gives the VAT amount and the base price) and, having collected the price, pays $1 to the state treasury (as VAT).

Now, imagine B goes on to resell the good "X" to C at a base price of $20. He charges the 10% VAT, which brings the total price to $22. He issues an invoice to C which states that, and having collected the price, should pay $2 to the state treasury (as VAT). However, from that amount he is able to deduct the $1 of VAT that was charged on the "input" good - therefore he only pays $1.

The effect is that B makes the full $10 on the resale and there is no compounding effect.

The same rule applies if B would use the good "X" as any sort of "input" for creating another good and then sold this new good (the input is understood broadly - for example, since I am not an employee but operate as an independent consultant, I charge VAT on my services to the lawfirm I work with - this means I can deduct VAT on any purchases I do that can be seen as contributing to my work performance, such as a mobile phone) he would be able to deduct from the VAT he would have to pay to the state treasury any VAT paid on the input good(s) by whoever sold him that good.

Only if B didn't "add any value" (hence the name of "VAT") and simply consumed the good, he would not be able to recover any VAT.

I know this sounds complicated, but the obvious advantage over a classic sales tax where you collect the tax only once, at the moment the good goes to the end user is that with the VAT system you don't need to make up your mind when you sell or purchase the good whether whoever is buying is going to be an enduser. Plus the state gets the money earlier, which I guess is good for them.

That

[Martinus]

One thing that is important is that VAT is charged (and can only be deducted by) "commercial" sellers. So if a consumer A buys the good from a shop (which charges him the price with VAT) and then resells the good not as a part of his commercial activity (but say on ebay) he doesn't charge VAT on that sale, but neither he can recover the VAT he was charged himself on the sale from the shop.

Only businesses and entrepreneurs can do so. Furthermore, normally, even if a business or an entrepreneur is selling a good or a service, but this is not part of its normal commercial activity, then again it is treated like a sale by a consumer.

I gave you an example before about my consultancy activity - if I decided to resell the laptop I bought, I would not be charging VAT on it, because my business is "provision of legal services" not "sale of laptops".

[Martinus]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

[Gups]

Say you don't tax food wich is considered essential, and you don't tax residential rents.
A rich person will usually eat more than the poor one.  In fact, the poor one may end up consuming more refined products (chicken wings, salted peanuts, chicken nuggets, frozen products, etc) than the rich one who could afford to have time to cook, or the very rich who could afford a cook.

When it comes to rent, a typical appartment in Le Vieux Québec will cost twice more than one in Limoilou (poorest place in the city), so the rich is getting off easy on this one because we don't want to penalize the poor.

You seem to be completely missing the point that the rich will be spending much lower percentage of their income on necessities, and thus if VAT is excluded on necessities, that would make for a progressive taxation system.  Progressivity is defined in percentage terms, not absolute terms.

But if you take necessities (food, clothing, housing, heating costs) out you are taking out a substantial proposrtion of your tax base (about 30% in the UK). Also, while bread and kids' t-shirts may be a necessity, caviar or posh frocks are luxuries.

[Alatriste]

But if you take necessities (food, clothing, housing, heating costs) out you are taking out a substantial proposrtion of your tax base (about 30% in the UK). Also, while bread and kids' t-shirts may be a necessity, caviar or posh frocks are luxuries.

Well, in Spain - I suppose it's more or less the same all over Europe - common bread, milk, cheese, eggs, fruits, vegetables, cereals, potatoes, onions & carrots pay the minimum (4%), all other food pays 7%. Bottled water, etc, pay 7%, alcoholic drinks 16%.

There is always potential for conflict, tough. For example, books & magazines in paper pay 4%, but in CDs or digital format they pay 16%! Publishers are complaining loudly, and rightly so, and I think that rule will be changed soon...

[alfred russel]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

You can also use the income tax to set behavior. I think the major advantage of the income tax over the VAT is that the VAT is much more avoidable. For most people it is easier to receive goods and services under the table than a paycheck.

[Valmy]

Only every twentieth man.

And I forgot, the employer pays about 30% of my salary as an employers fee to the state.

Wait wait your government charges a fee to companies for hiring people?

[Valmy]

Austin takes a 6.25% sales tax.  Period.  The other 2% plus all your property taxes go to your county and other local tax districts.  So if your property taxes are sky high, blame the city and the county.

Don't bore Fate with facts.

[Martinus]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

You can also use the income tax to set behavior. I think the major advantage of the income tax over the VAT is that the VAT is much more avoidable. For most people it is easier to receive goods and services under the table than a paycheck.

I disagree. Any business that can fail to issue an invoice and sell a service or a good "under the table" can also fail to recognize the income from that sale in the income tax filing. And unlike the income tax - which is paid by all citizens, VAT is paid only by businesses, which are much less numerous than citizens (and thus easier to check on) and have less incentives to cheat (unless you are dealing with the original manufacturer of a given good, someone who sells you some good and does it "under the table" is unable to recover the VAT he himself paid when he purchased the good or an input into it).

[DGuller]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

You can also use the income tax to set behavior. I think the major advantage of the income tax over the VAT is that the VAT is much more avoidable. For most people it is easier to receive goods and services under the table than a paycheck.

Isn't VAT structured in such a way that everyone has incentives to be honest (unlike the sales tax, where foregoing it can be a competitive advantage)?

[alfred russel]

So in the end, you could say that income tax penalizes those who invest (obviously VAT is only charged on goods and services, and not say on dividends) and make profits (since if you at least break even on the good's resale, your transaction is effectively VAT-neutral), and VAT penalizes those who consume or fail to make profit (since if you resell the good at a price lower than the one you bought it for, you won't be able to recover the full VAT on your purchase, obviously).

Plus VAT is much more flexible as an economic behavior tool, since you can set different VAT rates on different goods to boost consumption of some and not the others etc.

You can also use the income tax to set behavior. I think the major advantage of the income tax over the VAT is that the VAT is much more avoidable. For most people it is easier to receive goods and services under the table than a paycheck.

I disagree. Any business that can fail to issue an invoice and sell a service or a good "under the table" can also fail to recognize the income from that sale in the income tax filing. And unlike the income tax - which is paid by all citizens, VAT is paid only by businesses, which are much less numerous than citizens (and thus easier to check on) and have less incentives to cheat (unless you are dealing with the original manufacturer of a given good, someone who sells you some good and does it "under the table" is unable to recover the VAT he himself paid when he purchased the good or an input into it).

A lot of purchases could be shifted to ebay or other mail order places that may not have a VAT included.

People like us have almost no opportunity to cheat on income taxes. Our employers report our salary and our banks report our investment income, and those are the ways we make money. Shift to a VAT and suddenly we have many more opportunities for tax avoidance.

[grumbler]

I disagree. Any business that can fail to issue an invoice and sell a service or a good "under the table" can also fail to recognize the income from that sale in the income tax filing. And unlike the income tax - which is paid by all citizens, VAT is paid only by businesses, which are much less numerous than citizens (and thus easier to check on) and have less incentives to cheat (unless you are dealing with the original manufacturer of a given good, someone who sells you some good and does it "under the table" is unable to recover the VAT he himself paid when he purchased the good or an input into it).

I think a lot of people fail to understand this, and thus fail to comprehend the difference between sales taxes and VAT.  Your point is, I think, correct.

Edit:  DG beat me to this point.

[Admiral Yi]

Wait wait your government charges a fee to companies for hiring people?

Ours does too.

[grumbler]

A lot of purchases could be shifted to ebay or other mail order places that may not have a VAT included.

The seller has already paid VAT on the product (unless he or she is outside the VAT-charging country, in which case import duties exceed the savings on VAT)

Shift to a VAT and suddenly we have many more opportunities for tax avoidance.

Disagree completely.