[lbo-talk] taxation (was: cruise report

Bill Bartlett billbartlett at aapt.net.au
Thu Aug 2 00:19:01 PDT 2007


At 3:05 PM -0400 1/8/07, Wojtek Sokolowski wrote:


>[WS:] Yes, but let's for the sake of argument focus on the VAT proper.
>Unlike sales tax, VAT taxes only the value added rather than the sale price
>i.e. sale price less intermediate consumption (i.e. value of the input used
>in the production process.) That means that items with high value added
>i.e. high profit margin (or high compensation of employees for that matter)
>are taxed more heavily than those with low value added. That itself is a
>tax on profits and high executive salaries.

Exactly. A value added tax is not a tax on consumption, but a tax on profits. It is a misnomer to call it a consumption tax, it is a gross profit tax.


>Furthermore, VAT rate varies by kind of goods, luxury items being taxed at a
>higher rate (up to 22% in EU). By implication, certain goods, like basic
>necessities can be taxed at lower rate (7% in EU if memory serves) or exempt
>from VAT altogether.

In Australia the Goods and Services Tax (GST) is set at three different levels:

GST-Free, where there is no GST component to the final prices whatever. All GST that might have been paid on various inputs is credited to the GST-registered. Food, water, education, health care, charitable supplies are included in this classification.

Input taxed, where there is no GST is charged at the final point of supply. But neither can suppliers claim any tax credits.

10% GST, most things, at most stages of supply. Each GST-registered business in the supply chain must pay 1/11th GST of the price it sells goods and services for, less credits for 1/11th of the cost of taxable inputs.

Basic food (but not cooked food like hamburgers, confectionary and snacks) and a few other things like education etc are GST-free. Which means that the GST component of all inputs is refunded at every stage. So for example, a truck or any other equipment might include a GST component at the point of purchase by the basic food manufacturer or retailer, but the GST component of that input is credited/refunded to the GST-registered business.


>For these reasons, VAT has features that may prevent it from being
>regressive and, at the same time, can provide disincentive for wasteful
>consumption. What is wrong with that?

Its is, as you say, a tax on gross profit. How can that be regressive? The only possible way I can think of is that the administrative system required for such a tax is so pervasive, collecting data on such a wide range of business transactions, that it leaves very little wriggle-room for the black economy. The record-keeping required for businesses to claim GST credits is quite extensive.

Bill Bartlett Braknell Tas



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