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I'm American so I don't fully understand how VAT tax works but aren't these sorts of sales taxes generally regressive (i.e. poorer people pay a larger share of

I'm American so I don't fully understand how VAT tax works but aren't these sorts of sales taxes generally regressive (i.e. poorer people pay a larger share of their income). I think the tax code can be simplified but I don't think a pure VAT system is such an obvious winner

jopsen 9y ago
I always saw VAT as a sales tax that only applies to individuals. When a company buys something it doesn't pay VAT, but it pays it when selling to end-users. Benefit being that if companies A sells a half finished product to company B and company B sells it to a consumer then VAT is only paid once. Where as simple sales taxes would apply to transactions between company A and company B. Thus, incentivizing the formation of a conglomerate company AB consisting of both A and B. Reducing competition and flexibility, favoring big players over small. Am I wrong?
- xyzzyz 9y ago
  Yes, you are completely wrong. This is rather how sales tax works. With VAT, you do pay it on every link of the chain, but then businesses are allowed to recoup it on their purchases, while end-users are not. For example, if you are making and selling chairs, you pay VAT on the wood you are buying, and your buyer is also paying VAT on the chairs they buy from you. However, you are allowed to deduct the VAT you paid for wood from the VAT owed to the government by selling chairs. To make it concrete, suppose you buy wood for $1000, and sell chairs for $2000. Suppose VAT rate is 22%. Then you actually pay $1022 to wood wholesalers, and sell your chairs for $3066. Your sale of the chairs makes you owe $66 to government, but the invoice you got from wood wholesalers allows you to deduct from your tax bill the $22 you already paid when you bought wood, and in the end you only owe $44, which is exactly the 22% of the value you added ($3000-$1000 = $2000).
  - jopsen 9y ago
    Deduct and not pay are the same. Aren't they?
    - xyzzyz 9y ago
      No, because each part of the chain has to cut a check to the government for the tax obligation created at their part of the chain, while in sales tax system, only the final retailers have to do it. As a chair manufacturer, you don’t use the invoice from wood wholesaler to deduct their whole tax obligation, just a part of it.
dejv 9y ago
I am European and I don’t understand it either, so no worries. It is a big mess with tons of rules and exceptions and don’t let me started on reverse charges and various kinds of reporting.
pmyteh 9y ago
It's basically a sales tax, but with a reclaim of the sales taxes paid on 'input' goods. So If you make cars you charge a VAT of, say, 20% on the sales price, but get back the 20% tax you paid on the steel, and the tyres, and everything else. The net effect is that it's a sales tax on the value that each business adds to the product, rather than being compounded as goods are resold. It's still regressive, though.
zanny 9y ago
The difference between a VAT and sales tax is easy to understand in simplest terms: Sales tax is a percentage of the final sale price of a good or service. VAT tax is a fraction of the profits / revenue of every business involved in the production of a good or service. VAT is only complicated for businesses that sell things, but it also is not because the business basically writes off their purchases when they then sell them again to an end consumer. Between their purchase and sale they added value, and that difference is the tax passed on to the final consumer. All the government cares about is strict bookkeeping on how much stuff a company pays for and how much it makes from selling that stuff again in order to check that the VAT is accurate, and those figures are already required in most economies due to corporate taxes and / or payroll taxes.
- kgwgk 9y ago
  > VAT is only complicated for businesses that sell things, As oppossed to businesses with no revenue?
- avar 9y ago
  VAT also encourages the formation of conglomerates since you'll need to pay VAT to source some component of your product, but not if you make it in-house. This is mitigated in some cases by lower VAT rates for businesses or recouping schemes, but how much of a difference that makes depends on the jurisdiction
  - kgwgk 9y ago
    Say a company sells a product to a end customer for 100+VAT. A) the company builds the product from scratch => the whole VAT amount collected is transferred to the state B) the company buys components from a provider for 50+VAT => half of the VAT collected is given to the provider, the other half to the state How are A) and B) different for the company as far as the VAT is concerned?
    - avar 9y ago
      They're not as far as the amount paid, but VAT introduces taxation overhead to supply chains. Let's say company A makes a pencil in-house, and company B sources all the materials from 100 subcontractors. Company B will inevitably incur more overhead because it and its suppliers need to deal with the accounting of 100 taxable events, company A only needs to deal with one. Thus those 100 companies forming B will inevitably merge into one to compete with A and fire their state-imposed army of accountants.

jopsen 9y ago

I always saw VAT as a sales tax that only applies to individuals. When a company buys something it doesn't pay VAT, but it pays it when selling to end-users. Benefit being that if companies A sells a half finished product to company B and company B sells it to a consumer then VAT is only paid once. Where as simple sales taxes would apply to transactions between company A and company B. Thus, incentivizing the formation of a conglomerate company AB consisting of both A and B. Reducing competition and flexibility, favoring big players over small. Am I wrong?

xyzzyz 9y ago
Yes, you are completely wrong. This is rather how sales tax works. With VAT, you do pay it on every link of the chain, but then businesses are allowed to recoup it on their purchases, while end-users are not. For example, if you are making and selling chairs, you pay VAT on the wood you are buying, and your buyer is also paying VAT on the chairs they buy from you. However, you are allowed to deduct the VAT you paid for wood from the VAT owed to the government by selling chairs. To make it concrete, suppose you buy wood for $1000, and sell chairs for $2000. Suppose VAT rate is 22%. Then you actually pay $1022 to wood wholesalers, and sell your chairs for $3066. Your sale of the chairs makes you owe $66 to government, but the invoice you got from wood wholesalers allows you to deduct from your tax bill the $22 you already paid when you bought wood, and in the end you only owe $44, which is exactly the 22% of the value you added ($3000-$1000 = $2000).
- jopsen 9y ago
  Deduct and not pay are the same. Aren't they?
  - xyzzyz 9y ago
    No, because each part of the chain has to cut a check to the government for the tax obligation created at their part of the chain, while in sales tax system, only the final retailers have to do it. As a chair manufacturer, you don’t use the invoice from wood wholesaler to deduct their whole tax obligation, just a part of it.

dejv 9y ago

I am European and I don’t understand it either, so no worries. It is a big mess with tons of rules and exceptions and don’t let me started on reverse charges and various kinds of reporting.

pmyteh 9y ago

It's basically a sales tax, but with a reclaim of the sales taxes paid on 'input' goods. So If you make cars you charge a VAT of, say, 20% on the sales price, but get back the 20% tax you paid on the steel, and the tyres, and everything else. The net effect is that it's a sales tax on the value that each business adds to the product, rather than being compounded as goods are resold. It's still regressive, though.

zanny 9y ago

The difference between a VAT and sales tax is easy to understand in simplest terms: Sales tax is a percentage of the final sale price of a good or service. VAT tax is a fraction of the profits / revenue of every business involved in the production of a good or service. VAT is only complicated for businesses that sell things, but it also is not because the business basically writes off their purchases when they then sell them again to an end consumer. Between their purchase and sale they added value, and that difference is the tax passed on to the final consumer. All the government cares about is strict bookkeeping on how much stuff a company pays for and how much it makes from selling that stuff again in order to check that the VAT is accurate, and those figures are already required in most economies due to corporate taxes and / or payroll taxes.

kgwgk 9y ago
> VAT is only complicated for businesses that sell things, As oppossed to businesses with no revenue?
avar 9y ago
VAT also encourages the formation of conglomerates since you'll need to pay VAT to source some component of your product, but not if you make it in-house. This is mitigated in some cases by lower VAT rates for businesses or recouping schemes, but how much of a difference that makes depends on the jurisdiction
- kgwgk 9y ago
  Say a company sells a product to a end customer for 100+VAT. A) the company builds the product from scratch => the whole VAT amount collected is transferred to the state B) the company buys components from a provider for 50+VAT => half of the VAT collected is given to the provider, the other half to the state How are A) and B) different for the company as far as the VAT is concerned?
  - avar 9y ago
    They're not as far as the amount paid, but VAT introduces taxation overhead to supply chains. Let's say company A makes a pencil in-house, and company B sources all the materials from 100 subcontractors. Company B will inevitably incur more overhead because it and its suppliers need to deal with the accounting of 100 taxable events, company A only needs to deal with one. Thus those 100 companies forming B will inevitably merge into one to compete with A and fire their state-imposed army of accountants.