An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of...
An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of this.) The difference between a VAT and a corporate income tax seems to be that fewer expenses can be subtracted from revenue?
But then we should look at tax incidence. When deciding who pays a tax (the buyer or the seller) we need to take into account how prices will change. If the seller can raise prices to cover the VAT then the buyer effectively pays it. If there is enough competition then it might come out of profit margins instead.
This might be an argument for relying more on personal income tax? Not sure about that. It's complicated.
VAT seems confusing because there are a couple different ways to calculate it that are mostly equivalent. But I think it's still true that some products can be exempted, like a sales tax? Here's...
VAT seems confusing because there are a couple different ways to calculate it that are mostly equivalent. But I think it's still true that some products can be exempted, like a sales tax?
Here's what I mean by it being sorta like an income tax: for a business, profits are revenue minus expenses. The "value added" in a VAT is based on revenue minus the cost of some inputs, where those inputs are a subset of expenses where the supplier already paid VAT. So the business can subtract a lot less of their costs than they could with an income tax.
I don't know what definition you're using for VAT. In most places VAT is collected by the vendor businesses, but paid for by the end consumer. Businesses are exempt from paying VAT (if they've...
An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of this.) The difference between a VAT and a corporate income tax seems to be that fewer expenses can be subtracted from revenue?
I don't know what definition you're using for VAT. In most places VAT is collected by the vendor businesses, but paid for by the end consumer. Businesses are exempt from paying VAT (if they've reached certain financial thresholds).
I'm no expert but that sounds kinda backwards from what I'm reading? From what I can tell, it's pretty fundamental that VAT is paid by every business in the supply chain, not just retail sales?...
I'm no expert but that sounds kinda backwards from what I'm reading? From what I can tell, it's pretty fundamental that VAT is paid by every business in the supply chain, not just retail sales? (This is different from sales tax where wholesale purchases and products bought "for resale" don't get taxed at all.) In both VAT and sales tax, the idea is to avoid double-taxation, but they do it in different ways.
Also, it looks like businesses below a certain size may be exempt from VAT?
In most EU countries you can apply for a special scheme that enables you to trade under certain conditions without the need to charge VAT. If your company makes taxable supplies of goods or services below a certain annual limit, it may be exempt from VAT. This means you will not pay VAT to the tax administration but you will then not be able to deduct the input VAT or to indicate VAT on invoices. You may — if you choose — voluntarily opt for the normal VAT arrangements, in which case you must pay VAT and, consequently, can deduct the input VAT.
As for who pays, that gets into the issue of "tax incidence". Businesses try to make their prices appear as low as possible. Putting in separate line items for taxes and/or excluding a tax from their prices is a way to do that, but what really matters is the total amount that you pay.
From an economics perspective, who really pays a tax depends on how businesses update their prices to cover the tax. They might try to pass the entire tax on to consumers, but if the market is competitive, some of the tax might come out of their profit margins.
VAT is chargeable at each stage of the supply chain, but most businesses in that supply chain will be VAT-registered and thus will claim it back. But the main point is that VAT is not a tax on...
VAT is chargeable at each stage of the supply chain, but most businesses in that supply chain will be VAT-registered and thus will claim it back.
But the main point is that VAT is not a tax on businesses (even though they collect it), it's a tax on end consumers.
I understand that you're asserting that it's a tax on consumers, but how do you know that? Is it just that any business expense could be passed on to consumers? That doesn't seem to be how tax...
I understand that you're asserting that it's a tax on consumers, but how do you know that?
Is it just that any business expense could be passed on to consumers? That doesn't seem to be how tax incidence works? Here's an introduction to tax incidence.
In the UK a business can register for VAT (and must register if they meet certain financial thresholds). A VAT registered business buying from another VAT registered business must pay VAT on most...
In the UK a business can register for VAT (and must register if they meet certain financial thresholds). A VAT registered business buying from another VAT registered business must pay VAT on most items it buys, but can then reclaim that VAT from the government. A person cannot register for VAT as a private individual, and they only way they can reclaim VAT is if they live outside the EU and are taking the goods home or are a sole trader (a business) registered for VAT.
"Value Added Tax is a misleading entrepreneurial-sounding moniker for a tax ultimately paid by the consumer. In effect, it is a general consumption tax on goods and services, calculated by adding all of the costs involved in making and distributing goods or services, minus the amount that businesses can claim back during the production process for their "inputs": the raw materials, goods and services acquired in making the finished product."
"A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. Like an income tax, it is based on the increase in value of a product or service at each stage of production or distribution. However, a VAT is collected by the end retailer and is usually a flat tax, and is therefore frequently compared to a sales tax."
More complex cases of VAT fraud are typically known as carousel frauds. As part of these fraud schemes, goods are imported and sold through a series of companies before being exported again. The first company in the domestic chain charges VAT to a customer, but does not pay this to the government, becoming what is known as a "missing trader". The exporters of these goods claim and receive the reimbursement of VAT payments that never occurred.
A more complicated form is called “carousel fraud.” Goods are imported VAT-free but are not sold for consumption in the home market. The goods are sold through a series of companies, each liable to VAT, before being exported, possibly even back to the original seller.
In this type of fraud, the first link in the chain often goes missing without accounting for the VAT. The final link in the chain reclaims the VAT it has paid from the government before disappearing.
Thanks. Based on this and other reading I'm tentatively concluding that VAT being paid by consumers is at least conventional wisdom. It seems tax incidence can be a bit murky in general. From an...
Thanks. Based on this and other reading I'm tentatively concluding that VAT being paid by consumers is at least conventional wisdom.
Incidence studies can usefully be characterized as the "quantification of incidence assumptions." That is, economic theory provides "best guesses'' as to the incidence of various taxes among such broad groups as consumers, workers, and owners of capital, or burdens on such finely delineated groups as consumers of tobacco products, workers in a given Industry, corporate shareholders, etc. These group burdens are then attributed to income classes on the basis of the best available information on the distribution of the economic activity bearing the tax (consumption, labor income, capital income, cigarette smoking, or whatever) among the income classes. The tax burdens are ordinarily expressed as effective tax rates, that is, as percentages of income in each income class, so that a judgment can be made about the progressivity of the various taxes.
Clearly the results of such studies of tax incidence can be no better than the incidence assumptions and data underlying them. In some cases, for example, an excise tax on tobacco products or even a broad-based value added tax, tax incidence may be relatively straight-forward: smokers and consumers, respectively, probably pay these two taxes. 2 But in other cases, including the corporation income tax and the property tax, the answer is far less clear. Theory may give conflicting answers, even for thoughtful analysts, and empirical evidence is woefully deficient and ambigious. Even worse, "standard" incidence assumptions are often uncritically applied in situations in which they are not appropriate. Finally, the data required for a careful analysis of tax incidence often do not exist, especially in developing countries, Thus results for effective tax rates reported to the second decimal place exhibit "misplaced concreteness." Analysts are lucky if they know the last digit before the decimal with any confidence, and should not pretend otherwise. Unfortunately, few admit the weaknesses of their analyses (even if they recognize them), and the reader is often left to his or her own devices in discovering what has been done that may not be legitimate.
I agree that saving money doesn't do much by itself. It's essentially passive. Some people argue that saving money in a bank account allows it to be invested, but if you spent the money it would...
I agree that saving money doesn't do much by itself. It's essentially passive. Some people argue that saving money in a bank account allows it to be invested, but if you spent the money it would be in a different bank account, plus you caused or rewarded some economic activity. Either way, some bank somewhere has a low-interest loan in the form of a deposit.
But, Mankiw stacks the deck by saying that Frugal is an active investor who is actually good at picking profitable companies. (Hard to do!)
Also, while spending causes economic activity, not all economic activity is the same. The people who are catering to Spendthrift's whims could be doing something better with their lives. Spending could be worse than doing nothing if it competes with other spending that's more helpful. Though, it does redistribute the money, reducing long-term inequality, and whoever gets the money as salary or whatever can then go out and spend it on something better.
So, it depends. I'm not sure that's the strongest part of the essay but I agree with the larger point that rich people aren't all the same. Frugal is sort of neutral compared to someone like Bill Gates who funds charity work that wouldn't have been done at the same scale otherwise and encourages other billionaires to do the same. (Frugal's charity work is mediocre in comparison too.)
First, if you find something like plan A attractive and you recognize the equivalence of plan A and plan B, you should find something like plan B attractive. Many critics of universal basic income fail to make this leap because they do not notice the equivalence of these two approaches. Once you see the equivalence, Plan B is easier to embrace. And it looks even better when you realize that universal benefits and flat taxes are easier to administer than means-tested benefits and progressive taxes.
The second lesson from this example is how misleading it can be to focus on taxes and transfers separately. It is accurate to say that Plan A has lower taxes, more progressive taxes, and more progressive transfers. But so what? Those facts do not stop it from being precisely equivalent to plan B. The equivalence is clear only when taxes and transfers are considered together.
An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of this.) The difference between a VAT and a corporate income tax seems to be that fewer expenses can be subtracted from revenue?
But then we should look at tax incidence. When deciding who pays a tax (the buyer or the seller) we need to take into account how prices will change. If the seller can raise prices to cover the VAT then the buyer effectively pays it. If there is enough competition then it might come out of profit margins instead.
This might be an argument for relying more on personal income tax? Not sure about that. It's complicated.
VAT seems confusing because there are a couple different ways to calculate it that are mostly equivalent. But I think it's still true that some products can be exempted, like a sales tax?
Here's what I mean by it being sorta like an income tax: for a business, profits are revenue minus expenses. The "value added" in a VAT is based on revenue minus the cost of some inputs, where those inputs are a subset of expenses where the supplier already paid VAT. So the business can subtract a lot less of their costs than they could with an income tax.
(I think. I'm not an expert on it or anything.)
I don't know what definition you're using for VAT. In most places VAT is collected by the vendor businesses, but paid for by the end consumer. Businesses are exempt from paying VAT (if they've reached certain financial thresholds).
I'm no expert but that sounds kinda backwards from what I'm reading? From what I can tell, it's pretty fundamental that VAT is paid by every business in the supply chain, not just retail sales? (This is different from sales tax where wholesale purchases and products bought "for resale" don't get taxed at all.) In both VAT and sales tax, the idea is to avoid double-taxation, but they do it in different ways.
Also, it looks like businesses below a certain size may be exempt from VAT?
From: https://europa.eu/youreurope/business/taxation/vat/vat-exemptions/index_en.htm
As for who pays, that gets into the issue of "tax incidence". Businesses try to make their prices appear as low as possible. Putting in separate line items for taxes and/or excluding a tax from their prices is a way to do that, but what really matters is the total amount that you pay.
From an economics perspective, who really pays a tax depends on how businesses update their prices to cover the tax. They might try to pass the entire tax on to consumers, but if the market is competitive, some of the tax might come out of their profit margins.
VAT is chargeable at each stage of the supply chain, but most businesses in that supply chain will be VAT-registered and thus will claim it back.
But the main point is that VAT is not a tax on businesses (even though they collect it), it's a tax on end consumers.
I understand that you're asserting that it's a tax on consumers, but how do you know that?
Is it just that any business expense could be passed on to consumers? That doesn't seem to be how tax incidence works? Here's an introduction to tax incidence.
In the UK a business can register for VAT (and must register if they meet certain financial thresholds). A VAT registered business buying from another VAT registered business must pay VAT on most items it buys, but can then reclaim that VAT from the government. A person cannot register for VAT as a private individual, and they only way they can reclaim VAT is if they live outside the EU and are taking the goods home or are a sole trader (a business) registered for VAT.
In the UK adverts for goods and services must by law include the VAT, unless they're targetted at businesses. EG, this kitchen suppliers includes price without VAT and price including VAT. https://www.lockhart.co.uk/Kitchen-Equipment/Cooking-and-Bakeware/Pots-and-Pans~c~G2H This website aimed at consumers only has the price with VAT. https://www.johnlewis.com/browse/home-garden/cooking-baking/pots-pans/_/N-7d3b
This is because consumers pay VAT and cannot reclaim it.
https://www.theguardian.com/money/2010/dec/31/vat-brief-history-tax
"Value Added Tax is a misleading entrepreneurial-sounding moniker for a tax ultimately paid by the consumer. In effect, it is a general consumption tax on goods and services, calculated by adding all of the costs involved in making and distributing goods or services, minus the amount that businesses can claim back during the production process for their "inputs": the raw materials, goods and services acquired in making the finished product."
https://en.wikipedia.org/wiki/Value-added_tax
"A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. Like an income tax, it is based on the increase in value of a product or service at each stage of production or distribution. However, a VAT is collected by the end retailer and is usually a flat tax, and is therefore frequently compared to a sales tax."
https://www.investopedia.com/ask/answers/011915/what-valueadded-tax-vat-and-who-pays-it.asp
"Only business-to-customer sales are applicable for a VAT charge. Business-to-business sales may be exempted."
https://www.gov.uk/vat-businesses
"VAT-registered businesses:
for businesses: "You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases."
This collection and reclamation of VAT at every step is how carousel fraud / missing trader fraud can happen.
https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/economic-crime/mtic-missing-trader-intra-community-fraud
https://uk.reuters.com/article/uk-carousel-fraud-britain-factbox-sb/factbox-how-carousel-fraud-works-idUKTRE57J43U20090820
Thanks. Based on this and other reading I'm tentatively concluding that VAT being paid by consumers is at least conventional wisdom.
It seems tax incidence can be a bit murky in general. From an old working paper at the World Bank:
I agree that saving money doesn't do much by itself. It's essentially passive. Some people argue that saving money in a bank account allows it to be invested, but if you spent the money it would be in a different bank account, plus you caused or rewarded some economic activity. Either way, some bank somewhere has a low-interest loan in the form of a deposit.
But, Mankiw stacks the deck by saying that Frugal is an active investor who is actually good at picking profitable companies. (Hard to do!)
Also, while spending causes economic activity, not all economic activity is the same. The people who are catering to Spendthrift's whims could be doing something better with their lives. Spending could be worse than doing nothing if it competes with other spending that's more helpful. Though, it does redistribute the money, reducing long-term inequality, and whoever gets the money as salary or whatever can then go out and spend it on something better.
So, it depends. I'm not sure that's the strongest part of the essay but I agree with the larger point that rich people aren't all the same. Frugal is sort of neutral compared to someone like Bill Gates who funds charity work that wouldn't have been done at the same scale otherwise and encourages other billionaires to do the same. (Frugal's charity work is mediocre in comparison too.)
From the essay: