Wednesday, April 7, 2010

VAT

VAT is the acronym for "value added tax." You need to understand what this is, because it's coming our way. As we become more and more "Europeanized," we will have to turn more and more to European-style government financing methods and this one tops the list (the French government gets about half of its revenue from that country's VATs).

In a VAT, every time value is added to a good (or service) it is taxed. For example, when ore is mined from the ground and then smelted to produce iron, a VAT would be added. When a steel company takes the iron and turns it into a steel beam, a VAT would be added. When a construction company takes the beam and welds and cuts it to fit into a steel building, a VAT would be added. And when the erecting company takes the parts of that building and puts it up on someone's land, another VAT would be levied.

Businesses, of course, recoup the VAT by charging the consumer higher prices (but "businesses" don't pay taxes anyway--consumers always do).

You can see how the amount of the VAT can add up quickly--and how consumers, after the initial shock of price increases--get adjusted to it (it becomes invisible--you don't see that "Sales Tax" line on your receipt and you don't see the number on your paycheck or tax return). This is why governments like it so much--nobody sees it, people forget about it, and it can be raised with minimal fuss and outcry.

This isn't the sexiest of subjects--but it's important. I'll be blogging about it more soon, but I don't want to cause the eyes of too many readers to glaze over so I'm going to keep these short and sweet. :)

More later...

5 comments:

  1. I can't do enough, it seems, to disabuse people of the myth that corporations don't pay taxes. I will draw a graph and link to it (via photobucket) when time allows demonstrating that, because of market elasticity, corporations can not affect a X% price increase because of a X% tax, and still meet market equilibrium (ceteris paribus).

    I don't have any problem with a VAT by itself.

    *How* the government gets money is vastly less important than *How Much* money it gets, generally speaking.

    Any tax system can work, I think. But when you try to employ every tax system, you run into trouble.

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  2. That's fine. Over time, however, corporations don't pay taxes. I agree that if corporate tax rates go up 5% tomorrow that their prices won't typically increase by 5%. But over time you can be sure that they will recoup that cost.

    I worked as an accountant for two fairly large companies, and believe me, we factored taxes into our pricing decisions.

    And, sure, I agree with you on the VAT theory. The problem, of course, is that the government will impose it on top of everything else--not in place of anything.

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  3. It won't let me put an IMG but here's a link!

    The three horizontal lines show the price before the tax (bottom) the new equilibrium price after the tax (middle) and what the price would be if the company were able to factor in 100% of the tax increase into their prices and still meet equilibrium.

    The relative elasticity of the market determines exactly how much of the tax is able to be passed on to the consumer and how much must be absorbed by the company. But unless demand is perfectly inelastic, you can't pass 100% of the tax on.

    All other things held equal, corporations must pay a percentage of the tax both in lost sales (notice QD is lower) and through a price that does not fully reflect the tax increase.

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  4. Corporations have profits or they go out of business. That is their only purpose for existing. If their cost of supplies goes up, they either find a cheaper supplier or they raise prices on their finished product. If their cost of labor goes up, they either reduce that cost by "outsourcing, or laying people off, or raising prices. If taxes are increased, they must manipulate their expenses the same ways. Either the employees or the consumer absorb the cost. It is a zero sum game.

    Companies do NOT pay taxes. We the people pay taxes. When The One talks about taxing tanning salons or excise taxes or increasing the penalty on HSA dsitributions, it is ONLY the people that pay the taxes. Do you really think Sara, the owner operator of Bronze Bodies, really just sucks up the tax? I don't think so. Neither does Bill Gates.

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  5. How's this. Corporations don't pay taxes. They are either paid by customers (in the form of higher prices), stockholders (in the form of smaller dividends or capital gains), or employees (in the form of lower wages).

    :)

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