VAT: Value Added Tax

Used in 130 countries, including EU, Canada, Australia, some of Asia.
Imposed on the amount of “value added” to almost all products and services.
Tax = Rate x Value Added

Tax is owed on the amount of value added by each seller in the distribution chain.
But each seller only has to pay their net taxes.
The net effect is what we are used to:
An “n%” tax on the value of the retail sale.
Pro’s & Con’s

  • Tax is hidden into cost
  • Harsh on labor-intensive companies
  • Taxes companies even if they have a loss
  • Politicians like to manipulate %

  • No income or corporate taxes
  • Lower compliance costs
  • Compliance is greater
  • Encourages savings
  • Doesn’t discriminate against types of consumption

    • Comprehensive – No Quill problem
    • Adequately covers e-sale of physical goods and B2B services
    • Isn’t equipped to cover B2C services & digitalized products
    • The Netherlands:
      They’re rich … but where are they?
      e-VAT (cont.)

      • Problems faced in VATing e-commerce
        • Internet conceals identity, location, transactions
        • Encryption or storage of doc’s in other jurisdictions
        • Lack of audit trail, and ease of altering or destroying
      • Goals of e-commerce policy
        • No new taxes on e-commerce
        • Don’t stifle growth
        • Neutrality
        • Efficiency

      • Effectiveness
      • Certainty and transparency
      • International cooperation
      • Security of tax revenues
      Application In The U.S.

      • Alexander Hamilton thought it was a good idea (Federalist Papers #21)
      • Michigan has it (and look how they turned out)
      • Past proposals in Congress (failed)
      • Some say 23% tax wouldn’t be enough to replace personal & corporate income tax
      • Unlikely to happen here, but important to know about since most of the rest of the world uses it.

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