What is the VAT?

[DonCoquixote]

And how does it work?

I posted this several months ago, but I have seen it discussed as some sort of remedy by both left and right.

Input from du'ers in countries that have it is desired.

[donco6]

1. Value Added Tax

It's a tax levied on goods every time there's some processing done to them. So, when wool is processed into yarn, it's taxed. When yarn is used to make a sweater, it's taxed. It's a way to capture the increase in value all the way from raw material to finished good.

[grantcart]

7. see reply 6 below - VAT is exactly the opposite of what you indicate

VAT establishes one tax on the final value of the product.

It is collected at each stage of commerce but the business that buys that product gets a credit for the tax that was already paid.

If the VAT is 10% then that means that the consumer will pay 10% of the final value of the product.

Each stage of production and distribution pays the tax but also gets a credit for the tax already paid.

In your example the manufacturer who makes the sweater pays 10% on the product that he ships out he also gets a 10% credit on all of the raw material (in your example wool) that he purchased, so that the tax is only on THE VALUE ADDED, and not on the cumulative value.

You describe Value Cumulative Tax which is how most business and sales tax works, adding a net tax on each level of purchase.

[donco6]

9. I really didn't know they got a credit on what they'd paid.

Interesting. So the final consumer pays for the total value add. I thought they only paid the final value add - like the finish work on the sweater.

[grantcart]

11. Right so instead of being a tax that rewards vertical integration

i.e. one company that does everything and gets only taxed once it rewards small businesses that can come in and offer a specialized service without adding an extra level of taxation simply because another buyer has entered the chain from manufacturing to consumer.

But honestly the real reason is to give more benefit to manufacturers who export. If you compare US and German car manufacturers for example Ford Motor company would have all of the taxes on all of their suppliers (and all of those suppliers and so on) imbedded into their final cost. BMW would get a credit back from the government equal to all of the taxes that were absorbed into the product when they exported the car out of the country.

Normally these hidden taxes would excede the profits that a manufacturer would normally make so that it means that companies exporting from countries with VAT have a significant cost advantage, a much more important factor than interest rates that capture the headlines, for example.

[Angry Dragon]

2. United Kingdom has it

I am not sure about the rest of Europe.......

I think it works like a sales tax

[lumberjack_jeff]

3. It's a sales tax.

It's only a remedy for rich people who don't want their income taxed.

You need not look at other countries. Look at the state of Washington.

http://www.itepnet.org/wp2009/wa_whopays_factsheet.pdf

In Washington, the top 1% pay 2.9% of their income in state taxes. The bottom 20% pay 17.3%

[RUMMYisFROSTED]

4. Simply?

Blood from a stone.

[bif]

5. They have it in Canada as well.

Value added tax in Canada is known as Goods and Services Tax. The goods and services tax was introduced in Canada on the 1st of January 1991. It was introduced by Brian Mulroney, who was the Prime Minister at that time and Michael Wilson, who was the finance minister. The goods and services tax in Canada replaced the manufacturers' sales taxes. The main purpose behind introducing the goods and services tax was that the manufacturers' sales tax was having a negative impact on the export prospects of the manufacturing sector in Canada. The manufacturers' sales tax was hidden

[DonCoquixote]

13. OK

One question, do Canadians like it, or dislike it?

[grantcart]

6. It is a tax that is designed to help exporters and remove barriers to efficency

in distribution systems.


Let's say that the Value Added Tax (VAT) is 10%.

That means that the total amount of the tax will be on the last value times 10%.

For example if an item was made, distriubted and sold under a regular taxation system and the rate was 10% that would mean that 10% would be added at each stage of commerce.

So if it was made for $ 20 bought and sold for distribution by a wholesaler for $ 50 and sold to a franchisee for $ 70 and sold for retail for $ 100 then the total tax would be $ 2 + 5 + 7 + 10 = 24 or 24%. Under VAT it would be $ 10 because under VAT each stage gets a credit for the tax that was previously paid. For example the wholesaler would pay $ 5 but get a credit for 2 or net $3 and so on. One of the advantages of this is that it allows smaller companies that might have particular distribution advantages to be able to compete without creating a tax dis incentive by having another stage of taxes. The non VAT system favors larger companies that are more integrated and therefore pay less tax.

It is also designed to help manufacturers because many countries will refund 100% of the VAT for items that are exported.

[Riftaxe]

8. It is a regressive tax, meant to penalize

service industries and strangle small businesses that are not overwhelmingly profitable.

[grantcart]

12. Read 6 above. VAT helps small businesses and takes away the

single layer of taxes that vertically integrated large businesses have. There is no penalty to service industries but there is an advantage for manufacturers who export.

[closeupready]

10. A regressive tax that once instituted, will shift the tax burden from the rich to the middle class.

And, relatedly, take pressure off of the need to raise taxes on the rich.