The Tory wannabes are trotting out their tax plans, and a couple have mentioned looking at VAT (Michael Gove, article by Sam Dumitriu, and Rory Stewart, via @Sam_Dumitriu).
(Wow, Rory Stewart has "land value tax, at least for business and agricultural land" in his 'good' column and "business rates and no land value tax" in his 'current taxes' column. That's his leadership chances flushed down the toilet).
Gove and Stewart are politicians and don't know or care about economics. Dimutriu ought to know better and is the bigger fool for it. He goes along with the Big Fat Lie that VAT is some sort of harmless tax on 'consumption' or 'indirect tax' which does not affect production.
Let's take a step back and agree that income tax/NIC are taxes on wages or earnings and corporation tax is a tax on corporate profits. Their effect is pretty much the same, the percentage rates and administration is just different.
I trust we can also agree that workers and businesses 'add value', and the more value they add, the more tax they pay. So income tax, NIC and corporation tax are literally taxes on added value.
Value Added Tax is just more of the same!
We reach an equilibrium point between gross selling prices, net wages after tax and net profits after tax, that point is fixed by the overall tax wedge. Shuffling between these four taxes makes no difference to VAT-registered businesses.
It would make no difference to gross selling prices, output, net wages or net profits (of VAT registered businesses) if we:
a) went to one extreme and scrapped VAT and increased taxes on wages and profits; or
b) went to the other extreme and scrapped income tax, NIC and corporation tax and increased VAT to a very high rate.
Here's a worked example for a typical sort of VAT registered company, which sells output for £120 gross; pays £36 to VAT registered suppliers, pays gross wages (incl. employer's NIC) of £50; employees receive net wages of £30; and has profits before corporation tax of £20.
Current system, with VAT
Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16
No VAT, 17% extra Employer's NIC and 38% corporation tax
Gross sales.........................£120
Paid to suppliers...............(£36)
Gross wages.......................(£50)
Extra Employer's NIC
£50 @ 17%...........................(£8).
Net profit before tax.........£26
Corporation tax @ 38%...(£10)
Profit after tax....................£16
No income tax, NIC or corporation tax, VAT at 46%
For the non-mathematically minded, net sales £82 x 46% = £38; £82 + £38 = £120, so gross sales £120 as before.
Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£36)
Tax-free wages.................(£30)
Tax-free profit....................£16
-----------------------------------------------
The idiots out there think that because sellers can split the total selling price up into 'net' and 'VAT' that magically, consumers pay it.
If that were true, businesses could simply split the selling price into 'net', 'corporation tax' and 'VAT'. Would the idiots then believe that businesses don't pay corporation tax?
Wednesday, 12 June 2019
Value Added Tax is quite literally a tax on "value added". Why do people not think about what "value added" means?
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21 comments:
I am not sure that VAT raises any significant amount of net revenue at all, compared to what the exchequer would receive if it was scrapped. It is subject to the following costs and losses.
* Direct administrative costs to the government.
* Churning - taxpayers' money paid to people to pay the tax with. VAT forms part of the index to which pensions, benefits and public sector salaries are linked.
* Abstraction from other taxable revenue streams, which is essentially the point of the article above.
* Deadweight losses. The economy is smaller than it would otherwise be. This cuts into tax revenues and adds to welfare costs.
It would take some serious number-crunching to put figures to these costs and losses, but my hunch is that the real yield is not more than a third of the headline figure. It could be nothing at all.
I discussed the subject in this article here.
It would be hard to devise a worse tax than VAT. It inserts a fiscal barrier at precisely the point where supply and demand meet. Since demand is what drives all economic activity, VAT is as bad as a tax can get.
Bizarrely, rent is not subject to VAT.
You are missing the main characteristic of VAT in your worked examples because in all three examples the sum paid to the suppliers is the same. VAT taxes the margin that the business adds to the final selling price.
@Dinero
Prices are set by what customers will pay. Businesses have to absorb the tax, or at least some of it. Businesses need to maintain volumes of sales. That is why VAT cuts are only partially passed on in lower prices.
The VAT therefore cuts into profits and thence into rental levels. At the margin, VAT causes business to fall below the line and become non-viable.
With a threshold, there is an incentive not to expand business beyond the point that it becomes liable to VAT.
It's probably the worst tax any country could have.
Phys, ta for back up.
Din, the suppliers also have to pay wages and make profits, the equilibrium is unchanged.
What I am pointing out is that VAT does make a difference to the tax calculation. The Vat discriminates between the different sources of the costs of running a business. A firm that has a supplier bill as a big portion of the expenses pays less tax and has more net profit and a firm with a supplier bill as a small portion of the expenses pays more tax and has less net profit, when the two firms have the same overall expenses and the same gross revenue. And a firm whos profits come from a large margin over supplier costs pays more tax.
I had my loft converted . The VAT cost me £7K . That was more than my state pension for a year . Was I delighted ? The Government makes it more and more difficult for people to stay out of their deadly embrace . Vote LibLabCon . No thank you !
Din. Nope. Do a worked example from raw materials to end consumer, the total tax bill should be the same however the final selling price is split between primary, secondary and tertiary producers.
You wrote that shuffling between these four taxes makes no difference to VAT-registered businesses. I am pointing out that it does in the case of the individual business.
Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16
Swap the expenses between Gross wages and the expenses to the Suppliers including Vat
Gross sales.......................£120
Paid to HMRC as VAT.....(£11)
Net sales............................£109
Paid to suppliers, net.....(£41)
VAT paid to suppliers
and passed on to HMRC...(£9)
Gross wages......................(£36)
Net profit before tax..........£23
Corporation tax @ 19%.....(£4.4)
Profit after tax.....................£18.6
The profit is higher in the second case. The total revenue from all producers adds up to the same.
Din, you are doing a diagonal comparison and comparing business A with Business B.
Please compare business B tax bill under each method and you will find that the total tax paid by business B and its suppliers is much the same.
Yes I am comparing firms with a different make up of expenses to show that With VAT the Tax bill for the firms is different. With no VAT and corporation tax adjusted then the two firms would have a different tax bill than they did with VAT.
Din "different" to what? Are you comparing two businesses or comparing three tax systems? Please do not do diagonal comparisons.
It is not Diagonal comparison it is a comparison between to firms under two tax regimes to show the the different tax regimes effect them differently.
Firm A
Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16
Firm B
Gross sales.......................£120
Paid to HMRC as VAT.....(£11)
Net sales............................£109
Paid to suppliers, net.....(£41)
VAT paid to suppliers
and passed on to HMRC...(£9)
Gross wages......................(£36)
Net profit before tax..........£23
Corporation tax @ 19%.....(£4.4)
Profit after tax.....................£18.6
No VAT, 17% extra Employer's NIC and 38% corporation tax
Gross sales.........................£120
Paid to suppliers...............(£36)
Gross wages.......................(£50)
Extra Employer's NIC
£50 @ 17%...........................(£8).
Net profit before tax.........£26
Corporation tax @ 38%...(£10)
Profit after tax....................£16 (was £16)
Firm B
Gross sales.........................£120
Paid to suppliers...............(£50)
Gross wages.......................(£36)
Extra Employer's NIC
£36 @ 17%...........................(£6).
Net profit before tax.........£28
Corporation tax @ 38%...(£11)
Profit after tax....................£17 (was £18.6)
No income tax, NIC or corporation tax, VAT at 46%
Firm A
Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£36)
Tax-free wages.................(£30)
Tax-free profit....................£16 (was £16)
Firm B
Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£50)
Tax-free wages.................(£22)
Tax Free Profit....................£10 (was £18.6)
@Dinero
What really counts is tax incidence. It does not matter who is formally responsible for paying a tax. In the case of sales tax the incidence is partly on the purchaser and partly on the seller The share depends on the price elasticity of the goods and services purchased.
The ultimate incidence is on land rental values. If the total tax burden is too much, the land cannot be put to economic use. Z
Din, I agree those workings. It will be B's suppliers who make the corresponding tax saving.
It is not corresponding , maybe the supplier to B makes a tax saving maybe not . If the VAT is changed the sum that the firm called the supplier to B pays in tax will depend on how much VAT effects the firm supplier to B.
My theory is that VAT is basically equivalent to throwing grit into the cogwheels of the economy. It raises prices for customers, thus reducing sales, but it especially hits service business - why should having a room decorated or having a lawn mowed by a gardening company be taxable, there is no added economic value to maintenance? VAT also reduces the profits of small business. More importantly it does all these things at enormous bookkeeping and admin cost.
@Woodsy
Perfect analogy.
W42, "throwing grit into the cog wheels of the economy". You have nailed it. Let's forget the fancy economics. VAT means that lots of transactions which would have taken place don't take place.
MW. Woodsy. et al. Yep. it is a 'transaction tax', just what you don't want in the exchange economy. Or rather without exchanges there would be no 'economy', so reducing exchanges by taxing them reduces the economy.
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