It's difficult to argue with lies and half-truths

I have often pointed out that although there is a legal fiction that only end-consumers pay VAT (and a surrounding myth that somehow VAT doesn't damage the economy), in economic terms, VAT is a tax on gross margins (i.e. there is no deduction for non-VAT-able inputs, primarily wages and finance costs). Thus VAT is far more damaging than corporation tax, firstly because VAT raises four times as much from only half the economy - the other half is either exempt or zero-rated; and secondly because corporation tax allows a deduction for (nearly) all expenses, so if you aren't making a real profit, you don't pay corporation tax, but VAT is still payable even if the business is making a net loss.

It seems there are still far too many people who prefer the legal fiction than the economic reality - particularly annoying are people who run businesses that make VAT-able supplies to other businesses and believe that because their customers can "reclaim" the VAT they they are charged, somehow that VAT doesn't affect them.

Simple maths proves that this is twaddle. Let's assume you are a VAT-able sole-trader (with no input VAT) who provides services to the value of £115,000 to another VAT-able business. Your VAT bill is 13.04% of your gross margin, which in this case is the same as your profit, and you pay £15,000 VAT and then income tax/corporation tax on £100,000. Your customer pays you £115,000 and sells [whatever his end product is] for £230,000. His gross margin is also £115,000, so he also pays £15,000 'gross margin tax'. The idea that the end-consumer 'pays' £30,000 which the various businesses in the chain meekly collect on the state's behalf is laughable (even though this is how it is always presented).

If there were any honesty in the system, we could replace VAT with a 13.04% gross margin tax applied to the business who currently pay VAT and in cash-flow terms, absolutely nothing would change. (Sure there'd have to be some tweaking for zero-rated businesses, that's a different topic).

So far so bad. Having failed to convince many people of that VAT is The Worst Tax (with Employer's NI a close second, of course) and ought to be a priority in any tax-cutting programme, some bright spark then points out that "Businesses won't pass on the VAT cut".

Well of course they won't (or not in the short term at least), but that just illustrates my first point that VAT is a tax on gross margins!

Consider this: if we reduced corporation tax, would we expect businesses to "pass on" the corporation tax cut? Not particularly, as businesses would neither voluntarily "pass on" a reduction in a tax on net margins nor a tax on gross margins. In the medium term however, market forces would ensure that businesses pass on the VAT cut, because scrapping it would approximately double the net profits of hitherto VAT-able businesses. This would attract new entrants to the market, and the increased competition would ultimately push prices down. So not only would goods and services be cheaper overall, there'd be more businesses, more people in work, fewer businesses being sent to the wall by the tax system etc etc.

What's not to like?

PS - Another common objection is that we'd have to leave the EU first (as all Member States have to charge VAT of at least 15%). To me that looks like an argument in favour, not against...