| To be justified, taxes should satisfy a few | | | | constitute a smaller part of his income. This |
| conditions:Above all, they should encourage | | | | is the best definition yet found for |
| economic activity by providing incentives to | | | | regressivity.On the face of it - and for a |
| save and to invest. Savings - transformed | | | | very long time - VAT served as a prime |
| into investments- enhance productivity and | | | | example of regressive, unfair taxation.For a |
| growth of the economy as a whole.A tax should | | | | very long time, that is until the development |
| be simple - to administer and to comply with. | | | | and propagation of the Life Cycle Theories. |
| It should be "fair" (progressive, in | | | | The main idea in all these theories was that |
| professional lingo) - although no one seems | | | | consumption was not based on annual, current |
| to agree on what this means.At best, it | | | | income only. Rather, it took into |
| should replace other taxes, whose compliance | | | | consideration future flows of income (income |
| with the above conditions is less rigorous. | | | | expectations). People tended to be constant |
| In this case it will, usually, lead to budget | | | | in their level of spending (in different |
| cuts and reduce the overall tax burden.The | | | | periods in their lives) - even as their |
| most well known tax is the income tax. | | | | annual income vacillated. With the exception |
| However, it fails to satisfy even one of the | | | | of millionaires and billionaires, people |
| conditions above listed.To start with, it is | | | | spent most of their income in their |
| staggeringly complicated. The IRS code in the | | | | lifetime.VAT was, therefore, a just and equal |
| USA sprawls over more than 8,000 pages and | | | | tax. If income equalled consumption in the |
| 500 forms. This single feature makes it | | | | long run, VAT was a form of income tax, |
| expensive to enforce.Estimates are that 100 | | | | levied incrementally, with every purchase. It |
| billion USD are spent annually (by both | | | | reflected a taxpayer's ability to pay (=to |
| government and taxpayers) to comply with the | | | | consume). It was a wealth tax. As such, it |
| tax, to administer it and to enforce | | | | necessitated the reduction in other taxes. |
| it.Income tax is all for consumption and | | | | Taxing money spent on consumption was taxing |
| against savings: it taxes income spent on | | | | money already taxed once (as income). This |
| consumption only once - but does so twice | | | | was classic double taxation - a situation |
| with income earmarked for savings (by taxing | | | | which had to be remedied.But, in any case, |
| the interest on it).Income taxes discriminate | | | | VAT was a proportional tax when related to a |
| against business expenses related to the | | | | lifetime's income - rather than a regressive |
| acquisition of capital assets. These cannot | | | | tax when compared to annual income. Because |
| be deducted that same fiscal year. Rather, | | | | consumption was a parameter more stable than |
| they have to be depreciated over an | | | | income - VAT made for a more stable and |
| "accounting life" which is supposed to | | | | predictable tax.Still, old convictions die |
| reflect the useful life of the asset. This is | | | | hard. To appease social lobbies everywhere, |
| not the case with almost all other business | | | | politicians came up with solutions which were |
| expenses (labour, to name the biggest) which | | | | unanimously rejected by economists.The most |
| are deductible in full the same fiscal year | | | | prevalent was exempting a basket of "poor |
| expended in.Income taxes encourage debt | | | | people's goods" from VAT.This gave rise to a |
| financing over equity financing. After all, | | | | series of intricate questions:If food, for |
| retained earnings are taxed - while interest | | | | instance, was exempted (and it always is) - |
| expenses are deductible.We can safely say | | | | was this not a subsidy given to rich people |
| that income taxes in their current form were | | | | as well? Don't rich people eat?Moreover, who |
| somewhat responsible to an increase in | | | | will decide what is or isn't food? Is caviar |
| consumer credits and in the national debt (as | | | | food? What about health food? It was |
| manifested in the budget deficits). They also | | | | obviously going to be very hard to reach |
| had a hand in the freefall in the saving rate | | | | social consensus.If tax on these products |
| in the USA (from 3.6% in the 80s to 2.1% in | | | | were zeroed - taxes on other products would |
| the 90s). And money evading the tax | | | | have had to go up to maintain the same |
| authorities globalised itself using means as | | | | revenue. And so they did. In most countries |
| diverse as off-shore banking and computer | | | | VAT is levied on less than 45% of the GDP - |
| networking. This made taxing sophisticated, | | | | and is reckoned to be twice as high as it |
| big money close to impossible.No wonder that | | | | should be.Some sought to correct this |
| taxes levied on consumption rather than on | | | | situation by subjecting services to VAT but |
| income came to be regarded as an interesting | | | | this proved onerous and impossible to |
| alternative.Consumption taxes are levied at | | | | implement in certain sectors of the economy |
| the Point of Sale (POS). They are a mixed | | | | (banking and insurance, to name two).Others |
| lot:We all get in touch with Excise Taxes. | | | | suggested to dedicate VAT generated revenues |
| These are imposed on products which are | | | | to progressivity enhancing programs. But this |
| considered to be bad both for the consumer | | | | would have entailed the imposition of |
| and for society. These products bring about | | | | additional taxes to cover the shortfall.It is |
| negative externalities: smoke and lung | | | | universally thought, that the best method to |
| cancer, in the case of tobacco, for instance. | | | | "compensate" the poor for their regressive |
| So, when tobacco or alcohol are thus taxed - | | | | plight is to directly transfer money to them |
| the idea is to modify and reform our | | | | from the budget or to give them vouchers (or |
| behaviour which is deemed to be damaging to | | | | tax credits) which they can use to get |
| society as a whole. About 7% of tax revenues | | | | discounts in education, medical treatment, |
| in the USA come from this source - and double | | | | etc. These measures will, at least, not |
| that in other countries.Sales taxes have a | | | | distort economic decisions. And we, the less |
| more modest calling: to raise revenues by | | | | lucky taxpayers, will know how much we are |
| taxing the finished product in the retail | | | | paying for - and to whom.This is one of the |
| level. Unfortunately, so many authorities | | | | budgetary items which increase with the |
| have the right to impose them - that they | | | | introduction of VAT. Research shows that |
| vary greatly from one location to another. | | | | there is a strong correlation between the |
| This adds to the confusion of the taxpayer | | | | introduction of VAT and growth in government |
| (and of the retailer) and makes the tax more | | | | spending. Admittedly, it is difficult to tell |
| expensive to collect than it should have | | | | which led to what. Still, certain groups in |
| been.Moreover, it distorts business | | | | the population feel that it is their natural |
| decisions: businesses would tend to locate in | | | | right to be compensated for every income |
| places with lower sales taxes.Sales taxes | | | | reducing measure - by virtue of the fact that |
| have a malignant effect on the pricing of | | | | they don't have enough of it.But VAT is known |
| finished goods. First, no tax credit is | | | | to have some socially desirable results, as |
| allowed (sales taxes paid on inputs cannot be | | | | well.To start with, VAT is a renowned fighter |
| deducted from the sales tax payable by the | | | | of the Black Economy. This illegitimate |
| retailer). Secondly, the tax tends to | | | | branch of economic activity consists of three |
| cascade, increase the prices of goods | | | | elements:The non official sales of legal |
| (taxable and not, alike), affect investments | | | | goods (produced within the tax system)The |
| in capital goods (which are not exempt). It | | | | sales of illegal goods (which never were |
| adversely affects exports and domestic goods | | | | within the tax system)The consumption of |
| which compete with imports.In short: sales | | | | money not declared or disclosed to the tax |
| taxes tend to impede growth and prevent the | | | | authorities VAT lays its heavy paws on all |
| optimization of economic resources. Compare | | | | three activities.VAT is self enforced. As we |
| this with the VAT (Value Added Taxes): | | | | said, VAT offers a powerful (money) incentive |
| simple, cheap to collect, contain no implicit | | | | not to collaborate in tax scams. Every tax |
| taxes on inputs. VAT renders the pricing | | | | receipt means money begotten from the tax |
| structure of goods transparent. This | | | | authorities.VAT is incremental. To completely |
| transparency encourages economic | | | | evade paying VAT on a product would require |
| efficiency.VAT is used in 80 countries | | | | the collaboration of dozens of businesses, |
| worldwide and in 22 out of 24 OECD countries, | | | | suppliers and manufacturers. It is much more |
| with the exception of the federal ones: the | | | | plausible to cheat the income tax |
| USA and Australia.There are three types of | | | | authorities. VAT is levied on each and every |
| VAT. They are very different from each other | | | | phase of the production cycle - it is |
| and the only thing common to them all is the | | | | possible to avoid it in some of these phases, |
| tax base: the value added by the | | | | but never in all of them. VAT is an |
| taxpayer.Economic theory defines Value Added | | | | all-pervasive tax.VAT is levied on |
| as the sum of all the wages, interest paid on | | | | consumption. It is indifferent to the source |
| capital, rents paid on property and profits. | | | | of the money used to pay for it. Thus, it is |
| In the Addition VAT method, these four | | | | as easily applied to "black", undeclared, |
| components are taxed directly. The State of | | | | money - as it is to completely legal |
| Michigan in the USA uses this method since | | | | funds.Surely, there are incentives to avoid |
| 1976. Experience shows that this method | | | | and to evade it. If the amount of inputs in a |
| yields more predictable tax revenues and is | | | | product is very low, the VAT on the sale will |
| less susceptible to business or industry | | | | be very burdensome. A business non-registered |
| cycles.The Subtraction method, employed in | | | | with the VAT authorities will have a sizeable |
| Japan and a few much smaller countries, is | | | | price advantage over his registered |
| admittedly the simplest. It taxes the | | | | competitor.With a differential VAT system, it |
| difference between a taxpayer's sales and its | | | | is easy to declare the false sale of |
| taxed inputs. However, it becomes very | | | | zero-rated goods or services to linked |
| complicated when the country has a few VAT | | | | entities or to falsify the inputs, or both. |
| rates, because the inputs have to be | | | | Even computers (which compare the ratio of |
| separated according to the various | | | | sales to inputs) cannot detect anything |
| rates.Thus, the most widely accepted system | | | | suspicious in such a scheme.Yet, these are |
| is the Credit Invoice. Businesses become | | | | rare occurrences, easily detectable by cross |
| unpaid tax collectors. They are responsible | | | | examining information derived from several |
| to get tax receipts from their suppliers | | | | databases. All in all, VAT is the ultimate, |
| (inputs). They will be credited with the VAT | | | | inevitable tax.Moreover, it is virtuous. By |
| amounts on the receipts that they have | | | | making consumption more expensive, it would |
| collected, so they have a major incentive to | | | | tend to divert capital into investments and |
| do so. They will periodically pay the tax | | | | savings. At least, this is what our intuition |
| authorities the difference between the VAT on | | | | tells us.Research begs to differ. It |
| their sales and the VAT on their inputs, as | | | | demonstrates the resilience of consumers, who |
| evidenced by the receipts that they have | | | | maintain their consumption levels in the face |
| collected. If the difference is negative - | | | | of mounting price pressures. They even reduce |
| they will receive a rebate (in certain | | | | savings to do so. We say that their |
| countries, directly to their bank | | | | consumption is rigid, inelastic. Also, people |
| account).This is a breathtakingly simple | | | | do not save because it "pays better" to save |
| concept of tax collection, which also | | | | than to consume. They don't save because the |
| distributes the costs of administering the | | | | relative return on savings is higher on |
| tax amongst millions of businesses. In the | | | | savings than on consumption. They save |
| fiscal year (FY) 1977/8 in the UK - the tax | | | | because they are goal oriented. They want to |
| productivity (cost per 1 dollar collected) | | | | buy something: a car, a house, higher |
| was 2%. This means that the government paid 2 | | | | education for their children.When the yield |
| cents to collect 1 dollar. But businesses | | | | increases - they will need to save less money |
| paid the remaining 10 cents.If introduced in | | | | to get to the same target in the prescribed |
| the USA, VAT will cost only 3 billion USD | | | | period of time. We could say that, to some |
| (with 30,000 tax officials employed in a | | | | extent, savings display negative |
| separate administration). To collect 1 dollar | | | | elasticity.Markets balance themselves through |
| of income tax costs 0.56% in the USA. But, to | | | | a series of intricate feedback loops and |
| collect VAT in Norway costs 0.32%, in Belgium | | | | "true models" of economic activity. Take an |
| - 1.09% and, on average, 0.68%. In short, VAT | | | | increase in savings generated by the |
| does not cost much more than income taxes to | | | | introduction of VAT: it is bound to be short |
| collect.Yet, what is true for government is | | | | lived. Why? because the equilibrium will be |
| not necessarily so for their subjects.The | | | | restored.Increased savings will increase the |
| compliance cost for a business in the USA is | | | | amount of capital available and reduce the |
| $49. It is $53-282 in other countries.Small | | | | yields on this capital. A reduction in yield |
| businesses suffer disproportionately more | | | | would, in turn, reduce the savings |
| than their bigger brethren. It cost them | | | | rate.Moreover, narrow (differentiated, |
| 1.94% of VAT revenue in FY 1986/7 in the UK. | | | | non-ideal) based VATs lead to higher rates of |
| Rather more than big firms | | | | VAT (to generate the same revenue). This |
| (0.003%!).Compliance costs are 40 times | | | | reduces the incentives to work and the amount |
| higher for small businesses, on average. This | | | | of income available for savings.In a very |
| figure masks a larger difference in retail | | | | thorough research, Ken Militzer found no |
| and basic industries (80 times more), in | | | | connection between the introduction of VAT |
| wholesale (60 times more) and in | | | | and an increase in the rate of saving in 22 |
| manufacturing and utilities (45 times | | | | OECD countries since 1965 (VAT was first |
| more).It was inevitable to think about | | | | introduced in France in 1954). He also found |
| exempting small business from paying VAT.If | | | | no connection between VAT and changes in |
| 16 out of 24 million businesses were exempted | | | | corporate (profit) and income taxes.In Europe |
| - the costs of collecting VAT will go down by | | | | VAT replaced various turnover taxes so its |
| 33% - while the revenues will decline by only | | | | impact on anything was fairly insignificant. |
| 3%. KPMG claims that businesses with less | | | | It had no influence on inflation, as well. |
| than $50,000 annual turnover (18 out of 24 | | | | VAT apparently has two conflicting |
| million) exempted in the USA, revenues would | | | | influences: it raises the general price level |
| have declined by 1.5%. About 70% of the tax | | | | through a one time "price shock", on one |
| are paid by 10% of the businesses in the UK. | | | | hand. On the other hand, it contracts the |
| For 69% of the businesses there (with | | | | economy by providing a disincentive to |
| turnover of less than 100,000 USD annually) | | | | consume. If VAT does influence inflation - |
| the costs of collection exceed 60% of the | | | | its impact will be echoed and amplified |
| revenues. For 96% of the businesses (with | | | | through wage indexation and the linking of |
| less than 1 million USD a year) - the costs | | | | transfer payments to the Consumer Price Index |
| exceed 50%. Only in the case of 30,000 | | | | (CPI). In this case, maybe its effects should |
| companies - are the costs less than 20%. | | | | be sterilized from the calculations of the |
| These figures do not include compliance costs | | | | CPI.But research was able to demonstrate only |
| (=costs borne by businesses which comply with | | | | the potentially dangerous contracting, |
| the tax law).No wonder that small businesses | | | | deflationary (stagflationary, to be exact) |
| borrow money to pay that VAT bills. Many of | | | | influences of this tax. The recommendation is |
| them - though exempt - register voluntarily, | | | | surprising: the Central Bank is advised to |
| to get an endless stream of rebates. This is | | | | increase the money supply to accommodate the |
| a major handicap for the tax system and | | | | reverberations of the introduction of this |
| reduces its productivity considerably. In a | | | | tax.Finally, VAT is a "border adjustment" tax |
| desperate effort to cope with this | | | | (under the GATT and WTO charters).This means |
| law-abiding flood, tax authorities have | | | | that VAT is rebated to the exporter and |
| resorted to longer periods of reporting | | | | imposed on the importer.Prima facie, this |
| (instead of monthly). Some of them (in the | | | | should encourage exports - and equally |
| UK, for one) allow annual VAT reports.Part of | | | | discourage imports.Surprisingly, this time |
| the problem is political. There is little | | | | the intuition is right - albeit for a limited |
| disagreement between economists that VAT is a | | | | period of time.Despite a raging debate in |
| tax preferable to income taxes. But this | | | | economic literature, it seems safe to say the |
| statement comes with caveats: the tax must | | | | following:VAT increases the profits of |
| have one rate, universally applied, without | | | | exporters and producers of import |
| sector exemptions. This is the ideal VAT.The | | | | substitutes.VAT increases the investments in |
| world being less than ideal - and populated | | | | the trade sector.VAT increases exports and |
| by politicians - VATs do not come this way. | | | | decreases imports.These advantages are, |
| They contain many rates and exemptions for | | | | ultimately, partially offset by the movement |
| categories of goods and services.This | | | | of exchange rates.If certain sectors are not |
| mutilated version is called the | | | | taxed - investment will flow to that sector |
| differentiated VAT.An ideal VAT is | | | | and badly affect the trade sector and the |
| economically neutral - though not equitable. | | | | competitiveness of the country in world |
| This means that the tax does not affect | | | | markets.With its burgeoning black market, |
| economic decisions in ways that it shouldn't. | | | | under-developed export industries, huge |
| On the other hand, its burden is not equally | | | | shortfall in tax revenues - Macedonia |
| distributed between the haves and have | | | | urgently needs VAT.It will do well to learn |
| nots.VAT taxes value added in each stage of | | | | from the experience of others and introduce a |
| the production process. It does so by levying | | | | VAT which is as ideal as socially permissible |
| a tax on goods and services - but what is | | | | and politically possible.The draft law that I |
| really taxed are the means of production, | | | | have seen is a copy - almost verbatim - of |
| labour and capital. Ultimately, shareholders | | | | laws in the European Union and is riddled |
| of the taxpaying businesses pay the price - | | | | with exemption to various goods, services and |
| but most of them try to move it on to the | | | | sectors.VAT is a good idea - but it seems to |
| consumer, which is where the inequity begins. | | | | be starting on the wrong footing in |
| A rich consumer will pay the same tax as his | | | | Macedonia. |
| poorer counterpart - but the tax will | | | | |