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"VAT" (the idea) is certainly not a mistake, it's one of the best way to do taxes, because it's, if not painless, at least almost invisible to the taxpayer (but

by bambax 10y ago

"VAT" (the idea) is certainly not a mistake, it's one of the best way to do taxes, because it's, if not painless, at least almost invisible to the taxpayer (but it's considered by many to be unjust, because the poor spend a much larger part of their income in taxable goods than the rich, and so pay a bigger share of VAT). The complexity of VAT in Europe is recent. (I think) it used to be the case that if you sold something from one European country to another, then you weren't subject to VAT because it was considered an "export". Foreign companies (esp. US-based ones like Amazon) exploited this loophole so much, it became a problem. All they had to do was set up shop in a small, low-tax country [1] (Luxembourg / Ireland) and sell in every other country tax-free. So the EU created this rule that the VAT that should be paid, is the VAT of the country where the customer resides -- it had to be, because if it was the VAT of the seller's country then companies would have again clustered in the country with the lowest VAT in order to evade the new rule. It's not a bad rule; if you're a huge corporation, well, maybe you don't like it but you can hire the necessary lawyers and accountants to implement it. If you're an SMB that sells across Europe, it's absolutely horrible. I guess the bureaucrats who wrote the rule didn't care much about SMBs or thought there were few who sold internationally. It would be simple to exonerate SMBs based on their revenue (and I think it's the case, but the triggers are very low and different in every country); it would be even simpler to have just one tax rate but that's politically impossible. In practice it doesn't seem to be very much enforced for small companies. - - - [1] Low corporate tax, to optimize taxes even further; no need to be based in a low-tax country to free oneself from VAT; the smaller the country the better, because you want to have as few of your customers in the same country as you, as possible.

waynecochran 10y ago
I am admittedly naive on these matters, but I always thought that VAT is more efficient than a sales tax from the vendor's perspective and transparent to the consumer (an item costs $1.25 and you pay $1.25).
- kspaans 10y ago
  The main difference between VAT and sales tax is that VAT is paid by each stage in the supply chain (every time someone "adds value"), and reclaimed by charging it to the next stage up in the chain. Sales tax is charged only once, at the final point of sale to the consumer. The end effect is the same: the consumer ends up paying whatever % the tax is. The difference is in how it's collected. Sales tax is easier to evade because business-to-business sales usually don't charge sales tax. So you could wink at your customer and say they're a business and not charge them sales tax. With VAT everyone is supposed to pay it, so it's harder to evade (and consequently more expensive for governments to collect).
  - martinald 10y ago
    But on the other hand there is a catastrophic amount of VAT carousel fraud going on, which is even worse than just 'tax fraud' (ie: not paying tax) because the govt is paying out VAT losses but not then collecting the VAT gains in the carousel.
thescriptkiddie 10y ago
Fun fact. Collecting VAT based on the country where the customer resides is called border adjustment. In effect, all exports are tax-free, and all imports are taxed at the same rate as domestically-made goods. It is arguably the most important part of a VAT, because it levels the playing field in regards to international trade. This is in contrast to the way things are done in the United States, where exports are taxed, but imports (ignoring specific tariffs) are not. The whole scheme might seem a bit silly and over-complicated for digital goods and services, but from the perspective of people dealing in physical goods it actually simplifies the paperwork dramatically because the slate is wiped clean every time a good crosses a border. Now, what is unnecessarily complicated about VAT in Europe is the presence of very many exemptions. So rather than just doing the same paperwork for every good you sell, you have to consult a database to figure out that you should pay a reduced rate for good X or no VAT at all for good Y. This was done in the name of fairness to the poor — it doesn't seem right to tax essentials like staple foods or hygiene products. But arguably, it would have been much simpler to grant the poor an income tax break sufficient to cover the VAT they are likely to pay for such goods.

by bambax 10y ago

waynecochran 10y ago

I am admittedly naive on these matters, but I always thought that VAT is more efficient than a sales tax from the vendor's perspective and transparent to the consumer (an item costs $1.25 and you pay $1.25).

kspaans 10y ago
The main difference between VAT and sales tax is that VAT is paid by each stage in the supply chain (every time someone "adds value"), and reclaimed by charging it to the next stage up in the chain. Sales tax is charged only once, at the final point of sale to the consumer. The end effect is the same: the consumer ends up paying whatever % the tax is. The difference is in how it's collected. Sales tax is easier to evade because business-to-business sales usually don't charge sales tax. So you could wink at your customer and say they're a business and not charge them sales tax. With VAT everyone is supposed to pay it, so it's harder to evade (and consequently more expensive for governments to collect).
- martinald 10y ago
  But on the other hand there is a catastrophic amount of VAT carousel fraud going on, which is even worse than just 'tax fraud' (ie: not paying tax) because the govt is paying out VAT losses but not then collecting the VAT gains in the carousel.

thescriptkiddie 10y ago

Fun fact. Collecting VAT based on the country where the customer resides is called border adjustment. In effect, all exports are tax-free, and all imports are taxed at the same rate as domestically-made goods. It is arguably the most important part of a VAT, because it levels the playing field in regards to international trade. This is in contrast to the way things are done in the United States, where exports are taxed, but imports (ignoring specific tariffs) are not. The whole scheme might seem a bit silly and over-complicated for digital goods and services, but from the perspective of people dealing in physical goods it actually simplifies the paperwork dramatically because the slate is wiped clean every time a good crosses a border. Now, what is unnecessarily complicated about VAT in Europe is the presence of very many exemptions. So rather than just doing the same paperwork for every good you sell, you have to consult a database to figure out that you should pay a reduced rate for good X or no VAT at all for good Y. This was done in the name of fairness to the poor — it doesn't seem right to tax essentials like staple foods or hygiene products. But arguably, it would have been much simpler to grant the poor an income tax break sufficient to cover the VAT they are likely to pay for such goods.