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.