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Comment by csomar | Hacker News Reader

This is stupid and taxation for taxation purposes. It is all annoying. Why not have all taxes generated from sales Tax (VAT). For example, set the VAT for 30% and be done with it. No revenue tax. No profit tax. No capital gain tax. Just determine how much money you'r going to need, estimate the country consumption and then set the VAT.

Bonus point? No complicated tax reporting. No tax avoidance or evasion. Everything is simple.

But no, we gotta keep the system complicated to freakout new comers, terrorize the current small businesses and enable the big guys to get away with it however sophisticated it is.

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VAT is an extremely regressive tax that hits the poorest hardest, as they tend to spend a larger proportion of their income on taxable goods and services.

As a result, systems with high VAT rates tends to need to compensate in various ways, such as zero rating essentials, and higher benefits payments. It quickly ends up not being so simple.

> Bonus point? No complicated tax reporting. No tax avoidance or evasion. Everything is simple.

What makes you think VAT reporting will be simple, and that nobody will conduct fraud related to it? That's not my experience at all.

> VAT is an extremely regressive tax

VAT is proportional, not regressive. Rate regression can only occur if you spend more of your income on VAT-exempt consumption, which is generally not what happens.

Furthermore, a revenue tax is basically the long way around levying a VAT, the direct result is the same: an increase in consumer prices.

> VAT is proportional, not regressive.

It is proportional to the amount of money spent, which tends to make it regressive as a proportion of income, as poorer people tends to spend a much larger proportion of their income, and while you may find - depending on which types of products are VAT exempt - some slivers of the very poorest end up paying little VAT, for a lot of lower earning people in countries with high VAT rates it makes up the majority of taxes they pay, often to the extent of countering a lot of the usually progressive nature of income taxes.

> Furthermore, a revenue tax is basically the long way around levying a VAT, the direct result is the same: an increase in consumer prices.

And that would be one of the reasons people are concerned that a revenue tax would also be regressive.

Mainly because sales tax is a regressive tax. Rich people spend a smaller percentage of their money are are hence taxed at a lower rate than poor people. Also the sales tax would have to be way higher than 30% if we got rid of other taxes.

https://www.citylab.com/life/2015/01/how-local-sales-taxes-t...

There is a distinction to be made between VAT and sales tax, though. Not necessarily in the regressive nature, but its still important to make because the US really should adopt VAT taxes.

It is perfectly feasible to impose VATs on the sales of stocks, bonds, or the accumulation of dividends, etc. Those are still goods, they are just treated differently and artificially to give tax breaks to investors. There is no real reason why you cannot VAT a corporate share as much as you VAT a car, just most countries do not do so because TPTB want to maximize their profits off traditional investments.

It doesn’t make much sense to apply a value-added tax to the sale of a security or the distribution of dividends. And other taxes are already applied anyway.

Capital gains taxes are charged on the difference between purchase price and sales price, and as such has pretty much the same effect.

> sales tax is a regressive tax

Sales tax is a flat/proportional tax, not a regressive tax.

VAT is not regressive. Everyone is taxed at the same rate. Or doesn't matter if rich people spend lower percentage of their income. Sooner or later the money is spent and then it will be taxed. If it's nevertheless spent then someone (the rich person!) provided a service for free as they never asked anything back on it.

Seriously, it requires understanding of basic linear algebra to see that VAT isn't regressive. The article you linked makes the same mistake. You will be taxed at some point and if you multiply your money by investing before spending it then you're taxed on bigger amount. The rate ends up being the same for everyone.

> Or doesn't matter if rich people spend lower percentage of their income. Sooner or later the money is spent and then it will be taxed.

That'd be true if VAT applied equally to everything, but it doesn't. Your assumptions are invalid.

It is applied to consumption. Some, most often necessities are taxed less which lessens the burden for poorer people. Instead of dismissing my statement you could at least try to come up with one counter example. Every time I see "VAT is regressive" nonsense it's always based on misunderstanding. Yes, investments are not taxed but that's ok, if a rich person makes 20% a year from investment then they have 20% more money to be taxed once they engage in consumption (hence linear algebra remark). It really is about basic math to realize VAT isn't regressive but proportional (and even slightly progressive as necessities are taxed at lower % in many countries).

You can make consumption based taxed more progressive by taxing luxury goods at higher rate (which already many European countries are doing) as well.

> Every time I see "VAT is regressive" nonsense it's always based on misunderstanding. Yes, investments are not taxed but that's ok

There you provide one example yourself. Another is all consumption achieved by moving your consumption to somewhere else with low or no VAT.

I've done the math for my own expenditure from back when I didn't earn much to now, and the difference is stark.

>>Another is all consumption achieved by moving your consumption to somewhere else with low or no VAT.

I didn't. Investments are not consumption. At some point you are going to buy something you can use like a car, a house, food or w/e and there will be VAT there. If you never spend it on consumption then you are in effect providing a free service to everyone (accepting money but never buying anything). If you live in a country with VAT then buying abroad won't help you as you have to pay VAT on imports from non VAT countries.

>>I've done the math for my own expenditure from back when I didn't earn much to now, and the difference is stark.

Do you have any savings/investments now in comparison to there? What do you think will happen once you want to by something with those savings?

> Bonus point? No complicated tax reporting. No tax avoidance or evasion. Everything is simple.

In many countries, VAT fraud is actually the biggest, and it is literally stealing money from government. In Poland, it is estimated to be in billions of dollars a year. Go read about it: https://en.wikipedia.org/wiki/Missing_trader_fraud

Because Bill Gates or Jeff Bezos don't buy a jet per $1B in wealth accumulated. They buy one each and don't buy another until the first one fails.

Just because you have more money, that doesn't mean you consume more stuff.

For an economy based on money changing hands, what you propose would be devastating. We need to encourage spending.

Because VAT is regressive. Also, if it were set high enough to collect an entire state's revenue then it would be evaded on a spectacular scale: it's a tax on movable goods, many of which can be bought elsewhere in the EU and imported, let alone the possibilities of simply cheating on your return.

The rates of excise taxes on cigarettes and alcohol in the UK are essentially maximised due to evasion already, for example.

If you do want One Tax To Rule Them All, the most likely options are either some kind of land tax (because land doesn't move and can be confiscated in lieu of payment) or various kinds of Pigouvian taxes on fixed industrial polluters.

Depending on your implementation a VAT may not be progressive and may just be proportional, which is usually what you don't want in a tax system (because while its not nearly as bad as regressive taxation like the US corporate tax rates now, a neutral tax rate doesn't do anything to curtail the natural accumulation of wealth among the top echelon of earners). I've not looked into the individual EU VATs but my understanding is that most are just flat fractional taxes on profits paid by the consumer.

Such a system is rife for the same complexities as current tax codes as you start adding exceptions and refunds to try to offset the fact that the VAT on a commodity car would be the same percentage wise as on a Ferrari despite the later obviously being capable of paying more in tax if making such a lavish purchase. So you start adding tax credits to cheap car purchases or make a deductible and start adding and tweaking those across the board until you are right back where you started with an overtly complicated tax policy that has just shifted the complexity from tax collection to tax refunds.

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

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.

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?

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).

Deduct and not pay are the same.

Aren't they?

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.

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.

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

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?

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.

> VAT is only complicated for businesses that sell things,

As oppossed to businesses with no revenue?

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.

VAT only applies to consumption by citizens of a country. Not enterprises, not foreigners. If anyone were to sell services to foreign companies or individuals, they wouldn't generate taxes. If they were made mandatory, then their services would be at a serious competitive disadvantage because foreign companies couldn't get a tax refund in their local country.

In short, this plan is very very bad. Taxes are somewhat complicated, but they're designed this way for a reason, and there's a reason why nearly all countries have somewhat similar systems.

The problem with just VAT is that it effects the poor disproportionately due to the fact that the poor usually use a larger part of their money on things that charge VAT (living expenses)

A general “money changing hands” tax would be more fair but would wreck the economy.

As many others have pointed out VAT is regressive, it also becomes ineffective at very high rates as it encourages evasion and a black market.

VAT is non-progressive and thus unfair with the poorest

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