Tag Archives: VAT

11.14.2010 | A Big VAT

Dating back to the 18th century, the Chinese vase that a brother and sister found “in a dusty attic” sold for $69.5 million at a London auction. The NY Times called it a “treasure-in-the-attic” story. For us economists, it is a VAT story.

According to the OECD (Organization for Economic Cooperation and Development) the U.K.’s value-added tax rate is 17.5%. Typically, taxing “value added” means a tax is added to each stage of production. But, for this 16 inch, mostly yellow and sky-blue vase that was probably fired near Shanghai, the only value-added stage was the auction. With the VAT, the price of $69.5 million became $81.7 million. (I am not sure why the NY Times says that with the VAT and a 20% buyer’s premium, the final price was $85.9 million.)

If the same vase had been sold in NYC to a local resident, maybe an 8.875% sales tax would have applied. On the sell side, perhaps the IRS personal income tax obligation would soar.

You can see where this is going. Depending on where you are, because tax systems vary, so too do incentives. A VAT, as a consumption tax, is supposed to encourage saving. With the deficit commission proposing a vastly simplified tax system, we might see incentives change in the U.S.

The Economic Lesson

The OECD tells us that VAT revenue for close to 150 countries is approximately 20% of their total receipts. The United States is the exception. In the U.S., for FY 2009, the personal income tax generated 44% of all tax revenue while social insurance taxes accounted for 42%. Corporate income taxes were a distant third at 7%.

Posted by: adminEcon
Tags: consumption tax, federal revenue, fiscal policy, OECD, VAT
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04.18.2010 | A VAT For Pretzels?

The Senate just said “No” to a VAT. Disagreeing, Paul Volcker sort of said “Yes” when he observed that a VAT is “not as toxic an idea” as we once believed. Suddenly everyone seems to be talking about a VAT.

Here are some basic VAT facts:

1. What is it?

Most fundamentally, the VAT is a consumption tax, sort of a distant relative of the sales tax. Please think about a pretzel. A sales tax on a pretzel would be paid at the cash register. (Federal sales taxes now provide only 3% of federal tax revenue.)

The VAT, a value added tax, is also a consumption tax. If we levied a VAT, as with the sales tax, our pretzel would have a higher price. However, the consumer does not pay the entire tax at the cash register. Instead, at each production stage, the value that is added to the product is taxed.

With a 10% VAT, when $100 of wheat for pretzels leaves the farm, the flour maker who buys the wheat pays $100 for the wheat and a $10 tax. Then, when the pretzel factory buys the flour, it pays (very hypothetically) $1000 for the flour plus $100 VAT minus a credit for the taxes that were already paid. At each stage, the VAT is levied on buyers of the unfinished product; the consumer covers the final VAT payment. Piecemeal, through a sequence of tax forms, the federal government identifies and charges for “value added”.

2. Who uses the VAT?

Close to 100 countries generate revenue through a VAT. In France, for example, more revenue is raised through their VAT than through income taxes. I checked the OECD website and saw that VAT rates vary. Denmark: 25%; Spain: 16%; Thailand 7%.

But then I discovered that reality can be a lot more complex. In the U.K., for example, where food is tax free, they decided to exclude frozen yogurt that needs to be thawed. They faced similar dilemmas about children’s clothing, having to decide the whether small adult sizes are for children and even if flotation devices are clothing.

3. Why is a VAT desirable?

Many economists believe that a VAT can generate “a ton of revenue“. Also, as a consumption tax that elevates prices, a VAT can encourage saving.

4. What is wrong with a VAT?

It is regressive. That is why the UK VAT, for example, excludes food. Also, a VAT can be complex.

5. When was the VAT created?

The VAT was invented in 1954 by Maurice Laure, a French tax official.

You can see where all of this is heading. It’s complicated. The basic issue, though, is if we spend more, we need more revenue.

The Economic Life

In the U.S., the personal income tax generates 44% of all tax revenue while social insurance taxes account for 42%. Corporate income taxes are a distant third at 7%.

Posted by: adminEcon
Tags: deficit, federal budget, OECD, regressive taxation, Sales tax, VAT
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