VAT – More Than Meets The Eye [Reader Post]


Value added tax (VAT – applies to many countries) – A general tax applied at each point of exchange of goods or services from primary production to final consumption. It is levied on the difference between the sale price of the goods or services to which the tax is applied, and the cost of the goods or services brought into use in production.

Vertical integration – Is the combination of a parent firm and the suppliers of its raw materials or purchasers of its finished product. Vertical merger extends the lines of distribution or production, either backward toward the source or forward toward the end user.

Oligopoly – A market type in which small numbers of producers compete with each other

Predatory pricing – Where a firm sets its prices below average cost or unit cost in order to drive competitors out of business

Beware the VAT. We now have two former Chairmen of the Federal Reserve Board advocating for a European style Value Added Tax. A chorus of former heads of the FRB on any subject should send up red flags and cause the concerned citizen to take an in-depth look at the beneficiaries and consequences of such a policy.

To determine who might benefit from such a taxing policy we should examine the mechanics of a VAT. To do this let’s examine two different companies; One a small American business, MiniCorp, and the other a large vertically integrated multi-national called MegaCorp.

MiniCorp and MegaCorp make widgets. MiniCorp purchases its raw materials from a variety of vendors and relies on independent retail outlets for sales to the consumer. MegaCorp owns the mines, smelters, transportation system, manufacturing plants and retail outlets necessary to bring widgets to the consuming public.

Each time the goods that make up MiniCorp’s widget transfer from one company to the next, the value added tax is levied. Knowing how government works, I’m betting that any previous VAT levied would be included in the basis for any further VAT’s to be levied, thus compounding the tax rate. Regardless, I think it becomes evident to even the casual observer that MegaCorp being a vertically integrated company from raw material to end consumer would ultimately be liable for a much smaller amount of value added tax because a “profit” wasn’t necessary at each stage of production. Thus MegaCorp would be able to offer the consumer a product at a substantial discount over MiniCorp’s price.

This “hidden” advantage would greatly benefit the vertically integrated multi-national corporation to the detriment of entrepreneurial competition; furthering the consolidation of power in the hands of an elite oligarchy.

Although the definition of “predatory pricing” above is defined as a price below the cost of production, it is none the less predatory even if the price is above the cost of production when one companies cost of production is higher due to tax policies that the other company is not subjected.

Ultimately production is concentrated into fewer and fewer hands until oligopoly is achieved. Before we undertake a VAT, much examination of its ramifications beyond the obvious collection of taxes should be explored.

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Your understanding of how VAT works is mistaken. VAT does not get levied on top of previous VAT (at least in the UK version) and it effectively only finishes up being paid by the final customer. So all that happens is that the product costs 17.5% more to the final customer. Add that to the current top tax rate of Income Tax and National Insurance of 51% and the government gets almost 70% of our income.

Yeah, tell me about it… I’m an expat living in Prague, just paid 22% tax on appliances for the whole condo… as it is with cars here too.

We even pay 9% on groceries… utterly appalling

You are misunderstanding how the VAT works. Understand I’m not defending it nor trashing it, though I will admit that, as a mechanism for funding whatever government spending we feel we need to have, I vastly prefer to tax consumption rather than income. So, by the way, do many on the political “right”.

A VAT adds tax for the value added at each step. To keep the numbers simple, let’s suppose we have a 10% VAT, and that MiniCorp buys raw materials for $100, then sells finished products for $200. Thus, MiniCorp’s supply chain created $100 of value, and MiniCorp itself added $100 in value. MiniCorp is liable for $10 of VAT due to it’s value add. MiniCorp’s suppliers are liable for $10 of VAT. It’s true that MiniCorp is paying $110 for the raw materials now, however it’s obliged to collect $20 on the final product of $200, and can deduct the $10 of VAT paid to the down-stream suppliers.

Whether MegaCorp has an advantage or not, the VAT doesn’t really impact it. MegaCorp might have an advantage in that it’s willing/able to accept a lower overall profit margin on the finished product. That effectively means MegaCorp is less profitable on some portion of it’s operations. MegaCorp has that advantage, if indeed it is an advantage, even if there is no VAT.

Is the VAT a substitution for the Income Tax? If not, DUMP THE IDEA NOW. We’d be better off renewing talk about getting a Flat Tax going whereby EVERYONE pays just ONE rate and the government should be FORCED to balance it’s budget. In California, they’re collecting signatures to place on the BALLOT a measure that, when enacted, would force California’s legislature to BALANCE it’s budget by a certain date. I don’t know what the penalty might be for failing to do so, but if it has teeth we may get a balanced budget.

Flat Tax is the best idea, though. Right now we have over-taxation and taxation without representation; both of which are worth fighting against. Get Obama’s ash out of the white house.

Hi Doug. As VAT works in the UK (using the figures in your example) Minicorp buys its material at $100 plus $10 VAT. However it can reclaim the $10 from the government on its quarterly VAT return so the net cost is still $100. On its final sale at $200 it charges $20 VAT so the end consumer is the only one who finishes up paying the VAT. Mega corp produces the same goods with no supplier and charges $200 plus $20 VAT. The net revenue to the exchequer is the same and the cost to the consumer is the same. (By the way, this is a somewhat simplified explanation.) The endless filling in of VAT returns and their checking requires an army of Her Majesty’s Revenue & Customs inspectors, and another layer of paperwork for businesses. This helps to keep our productivity further depressed.

Since there is no VAT law written for the US at this time, any proffering of “how it works” is at best speculation. If as John B claims in #5 that only the consumer pays any VAT and only on the finished product price, this appears to be a simple sales tax since as he points out, previously paid VAT’s that are recouped through the employment of an army of accountants with the government the beneficiary of the “float” while goods are funnelling through the production process. Simplifying it would mean to delay collection of the VAT until the goods reach the final consumer the same way our sales tax is exempted for businesses that purchase goods for resale, thus eliminating the ‘army’ of accountants and added expense that ensues.

As for John B’s assertion in post #1 that I am mistaken on how VAT works, I must take exception. “knowing how government works”… and having a law as yet unwritten in the US means that no one knows for sure how it would work here and “knowing how government works”, I wouldn’t put anything past these greedy b@stards if they think they can get away with it.

I am definitely a supporter of taxing consumption over income… but part of this exercise is to point out that there is no NORMAL way of doing it at this time and if we “assume” it will be one way, we may have a rude awaking when those assumptions prove incorrect. NEVER TRUST A POLITICIAN…. especially when it comes to sneaky ways to bend you over in order to get at your wallet.

The V.A.T. would only apply to 5% of the people. Remember Obama’s PROMISE that 95% would not get a tax increase? He always keeps his promises. What I haven’t figured out is if I am one of the 5% or 95%.

The VAT is a suckers bet to the public. Here in Germany lets say Person 1 buys a car for 25,000 Euro. Of that price 19% flows to the government.

Now, three years later they want a new car and the dealer takes their car in trade. They offer it for 13,000 Euros and when a buyer appears of the price they paid 19% flows to the government.

Hum, they got full VAT from the first buyer, how much value was applied to the used car to justify another bite of 19%.

Oh, and did I mention we pay income tax that in the US would have just a middle income earner in the top 1%! Oh, and assorted other taxes and fees. Yes, the VAT is good, that is, if you are the government.

Hi Donald. Sorry you take exception to my comment that you are mistaken as to how VAT works. My comment was made in the light of your description of the proposed US VAT as ‘a European style Value Added Tax’. If it is indeed to be a European style tax, then my description of how the system works is correct. Hope this clarifies my position. Best wishes, John.

John B, is Buck’s VAT scenerio in Germany the same as it would be in the UK?

If I have paid $25K Euro plus a VAT and I sell the car for $12K less would I get a refund of the VAT paid on the $`3K difference?

Are all VAT tax laws throughout Europe the same? If not, are the UK’s “european style” VAT laws the only ones relevant to this discussion?

@ Smorgasbord

After Obama raised federal Cigarette taxes his first weeks in office, I had to conclude that I’m in the 5%. If this is wrong, then I want a refund as I’ve overpaid. Perhaps the government should give me a card that says I’m in the 95% and that I’m exempt from the increased tobacco taxes. Aye carrumba… my two remaining brain cells are soooo confused.

VAT laws on cars are exceptional. Since most car buyers are not registered for VAT then they cannot claim back the VAT on the price of the car in the first place. Likewise the sale of the car has no practical effect for VAT purposes on the majority of sellers. In the UK even people registered for VAT cannot generally claim the VAT back on the purchase of a car since the law states that the car has to be 100% used for business if the claim is to be made. I believe that the same principles for VAT apply throughout the European Union as in the UK and Eire. (By the way, I make my living at this….somebody has to)

At this point, learning about all the beauracratic paperwork involved in VAT and refunds of VAT’s paid i would not be in support of such a system. I think I’d prefer a simple consumption tax similar to the sales tax currently employed by local and state governments here in the US. If you are a reseller of goods, no tax would be collected until the product reached the final consumer. The US already has those mechanisms in place in most locales, they are straight forward and proven.

I definitely would prefer to see a national sales tax in lieu of an income tax but can’t say I’d be enamoured with a system utilizing both. In order to make such a system less regressive for low income individuals I would exempt food, the first $1,500 of any monthly housing payments (mortgage or rental), and any second hand clothing purchases (or exemptions for any goods sold through authorized thrift stores).

I’d also like to see our federal expenditures cut in half. A reduction in the Federal work force by 50% and government pay rates tied to private sector pay for similar work. The elimination of all foreign aid, the return of all US troops from overseas bases, to include Germany, South Korea, Iraq, and Afghanistan within 5 years. The elimination of the Departments of Education, Agriculture, HUD, Commerce, Labor, Health and Human Services, Transportation, and Energy. Any functions that these departments do that are necessities could be folded into the duties of the remaining departments.

The privatization of Social Security with 70% of Social Security receipts for workers 30 through 55 deposited in privately managed retirement accounts and 30% used to pay for existing retiree obligations. Progressively reduce the amount of SS benefits for workers based on age. IE: a worker 55 that would retire in 15 years would receive his private account payout and 60% of his/her SS benefit, a worker 50 would receive his private account payout and 50% of SS benefit, etc, etc… until all new workers would recieve 0% SS and 100% private account. Once all legacy SS recipients have passed on 100% of SS receipts would be deposited in privately managed accounts. (these are just numbers off the top of my head… so don’t react like they are set in stone)

Reduce our taxes on manufacturing businesses to the lowest in the world. Eliminate the ability of corporations to own stock in other corporations and regulate executive compensation and bonuses of publicly traded corporations (this would not apply to any privately owned corporation)

I’m ready for some drastic changes in the way the US does business and I think the majority of Americans are too!

“The privatization of Social Security with 70% of Social Security receipts for workers 30 through 55 deposited in privately managed retirement accounts and 30% used to pay for existing retiree obligations. Progressively reduce the amount of SS benefits for workers based on age.”

In 1976, I was in graduate school and proposed much the same solution to what I saw as a coming train wreck in SS.

My wise professors listened quietly and then explained to me that SS was a sound program and no radical changes were needed.

At least not from a 22 yo bomb throwing conservative student!! Come on, what does a 22 yo know?


More proof that academia is full of educated idiots. I am more and more convinced that higher education has turned into an exercise in “learning to conform”. The whole idea that we need 100% of our youth to attend college only deflates the value of a college education while enslaving more and more to the debt and interest of attaining a diploma that carries an ever inflated price tag.

VAT will not replace the income taxes.It will simply be another tax.It is simply amazing how the Sheeple are so willing to let the Dems take their last dime on the promise of soaking the rich and being taken care of by the government.

Donald you need to read the seekingalpha article I posted on the prior thread. Although the entire article is well worth reading (even if you don’t agree with the author), you can skip down to the chart that shows projections for Federal spending out through 2040 and beyond.


Charts pertaining to budget:

Mind you this article was written 2 years ago, just before the financial crisis and all the bailout spending, as well as Obama’s election, the stimulus spending, and now the new healthcare entitlement. In other words, things have gotten much, much worse since this was written.

The second chart helpfully shows everything scaled as a % of GDP. What you’ll see is that the budget completely explodes due to the entitlement programs. The chart shows a line at approximately 19% of GDP, which is roughly what the federal government collects in income tax revenue. (Mind you I’m not sure if the author correctly included FICA and medicare tax revenues – since WW2 the federal government has collected roughly the same amount of GDP through income taxes, regardless of marginal rates.)

The budget for SS, medicare, and medicaid swells to this level 2030. Forget cutting government employees by 50%, you’d have to cut everything else the government does by 100%, including the military, and stop paying any interest on our debt, and still you won’t be able to balance the budget past that point. Obviously we can’t cut the “discretionary” spending to 0, nor can we repudiate our the debt and expect to keep borrowing.

What you might do is try to find some way out of the mess or at least delay the cross-over point. Since the chart is scaled to GDP, yet the cost curves are driven by existing demographics, higher GDP growth than projected might help. Don’t count on much from that – we’re a mature economy and even if we eliminate all the growth-killing crap we now have, it’s not realistic to expect better than 3-4% growth. Cutting some of the discretionary spending as you’ve suggested might help reduce the growth rate in the debt, and hence bring down the interest-rate curve somewhat. But that really only explodes in the out years due to the accumulation of deficits. Also I think you badly overestimate how much can reasonably be cut; much of the government is one way or another enforcing laws or defending our country.

Notice that SS isn’t the biggest driver – it’s roughly steady as a % of GDP and could be fixed with some small tweaks to either the tax rate, the retirement age, or the income cap. Privatizing it ain’t gonna work, and in any case ain’t gonna matter much because…notice that the biggest single driver for the out-of-control spending is medicare/medicaid. You’ll need to take a hard look in that area if you want to have a successful plan that gets us through to mid-century without a fiscal implosion.

@Buck…Hey Pardner, the privatization of a box of Congressional IOUs is irrelevant at this point.
The seizure of the Pensions of the Congress weasels that wrote the IOUs to make them good is far more appropriate.

@Donald Bly: Maybe we need a program like businesses give seniors a discount. If I am in the 95% group I can show my card and any business has to subtract whatever EXTRA taxes they are paying on each item since Obama made his promise.

That made me wonder if Obama knows what a promise is. That made me think of the funny definitions there are for words depending whether you are a redneck, truck driver, etc. If a politician’s dictionary hasn’t been published, there needs to be one.

Politician’s Dictionary – Fiscal Restraint – A policy of spending and taxation where taxation equals 100% of a taxpayer’s income and spending equals 200% of a taxpayer’s income.

The article to which you posted a link is interesting but very outdated. One would think after reading it that our situation is hopeless, which greatly discounts that fact that WE ARE AMERICANS and there is no such thing as hopeless… at least not in my vocabulary!

We are an amazing people – at least those of us that haven’t given themselves over to the desparation of a socialized society.

Our agricultural capacity is enormous and you just can’t eat gold or oil. Our ability to create and to manufacture is equally enormous. We still have vast amounts of natural resources and an amazing amount of working infrastructure. What we need to do is get the evironuts and government out of our way. We need to exalt those that do and relegate those that don’t to their rightful place.

It’s time for tough love… slashing the governments budget by 50% is a start. Despite the stereotypes, there are people lanquishing in government jobs that could actually be productive if they were shown the door to private employment opportunities. They won’t starve… they’ll get off their asses and produce… Oh granted there will be the anecdotal sob stories, there always are.

The sooner we get rid of the socialists in government positions and power, the sooner we can start the healing process…. read up on Harding and Coolidge… both smart men in our not to distant past. Forget the policies of Wilson, FDR, LBJ, Carter and Obama. Their policies have been proven to be bogus, let us embark on real recovery that starts first with a dose of pain in order to set the bones of a fractured economy.

Basically, the only good VAT is no VAT. We in Europe have found out this fact the hard way, each and every year because it’s rising, even in low-tax countries like Switzerland. A VAT is way too convenient for everybody, including the tax payers not to rise regularly, to finance this and that (it’s the invalidity insurance in Switzerland, in Germany, they wanted to pay back debts (which will of course never happen – somehow, you got to finance the Greek budget deficit so the Euro doesn’t crumble)), and never to be lowered again, while maintaining all other taxes.

So, if you get a national VAT, you’re going to get screwed.