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Old 9th October 2019, 01:40 PM   #1
Bob001
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Tell me about VATs.

As I understand it, a value added tax is a tax on the difference between the sales price of a product and the cost of producing it. Somebody buys flour, water and yeast and sells bread; he pays a tax on what he made from the bread, minus the cost of his materials and overhead. A sandwich shop slaps ham and cheese on a couple slices of bread, and is taxed on the price of the sandwich minus the cost of the bread, ham, cheese, labor, etc.

Many countries use VATs, and it has often been suggested for the U.S. How does it work in practice? How are costs allocated in something as complex as a car or a house? How complex is the record-keeping? What is the potential for fraud? Why is it superior to a basic sales tax, where most sales are taxed at the same flat rate? Etc.
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Old 9th October 2019, 02:07 PM   #2
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The Wikipedia article seems rather robust in its detail. I'm not sure if it would work that well for the USA. The VAT, unlike the sales tax, seems to be nationwide. By that, I mean that the rates are dictated by the federal government as opposed to state and local. Sure, Canada has both a VAT and a sales type tax that funds both the federal and local governments. For the US, it would have to be apportioned, as a direct tax, which would be messy.
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Old 9th October 2019, 02:21 PM   #3
Bob001
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Originally Posted by Leftus View Post
The Wikipedia article seems rather robust in its detail. I'm not sure if it would work that well for the USA. The VAT, unlike the sales tax, seems to be nationwide. By that, I mean that the rates are dictated by the federal government as opposed to state and local. Sure, Canada has both a VAT and a sales type tax that funds both the federal and local governments. For the US, it would have to be apportioned, as a direct tax, which would be messy.
Why? Why couldn't there be a federal VAT or a federal sales tax going to general revenue, just as there's a federal income tax? U.S. states and cities already impose their own sales taxes, and every business pays various taxes to local, state and federal authorities. A national VAT/sales tax would be just another set of papers to file.
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Old 9th October 2019, 02:23 PM   #4
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Originally Posted by Bob001 View Post
Many countries use VATs, and it has often been suggested for the U.S.
6 countries use the VATs, Egypt, Suriname, Brazil, Angola, Serbia and Russia.
Quote:
How does it work in practice?
How are costs allocated in something as complex as a car or a house?
Price X windows + wheels / (handles - toilets)
Quote:
How complex is the record-keeping?
How familiar are you with Bessel functions?
Quote:
What is the potential for fraud?
I can tell you for £100 net + 25% VAT. That is £130 gross
Quote:
Why is it superior to a basic sales tax, where most sales are taxed at the same flat rate? Etc.
It is superior because most sales are taxed at different rates
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Old 9th October 2019, 02:32 PM   #5
Leftus
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Originally Posted by Bob001 View Post
Why? Why couldn't there be a federal VAT or a federal sales tax going to general revenue, just as there's a federal income tax? U.S. states and cities already impose their own sales taxes, and every business pays various taxes to local, state and federal authorities. A national VAT/sales tax would be just another set of papers to file.
The constitution only permits income taxes. Also, Article 1 section 9 clause 5 might forclose on the idea directly.

Clause 5: No Tax or Duty shall be laid on Articles exported from any State. So interstate VAT is expressly forbidden.
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Old 9th October 2019, 02:41 PM   #6
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Originally Posted by Leftus View Post
The constitution only permits income taxes. Also, Article 1 section 9 clause 5 might forclose on the idea directly.

Clause 5: No Tax or Duty shall be laid on Articles exported from any State. So interstate VAT is expressly forbidden.
Would that really apply? Or was it intended to prevent states from being taxed -- or taxing each other -- like foreign countries? Would it refer to a tax applied directly at point-of-sale, like any state sales tax, as opposed to some kind of import or border tax?

I can see cases going through the courts for years.
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Old 9th October 2019, 02:50 PM   #7
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Originally Posted by Lothian View Post
6 countries use the VATs, Egypt, Suriname, Brazil, Angola, Serbia and Russia.
.....
VATs are applied throughout the European Union.
https://www.ricksteves.com/travel-ti...ates-in-europe
https://www.vatglobal.com/eu-vat-table

Originally Posted by Lothian View Post
How familiar are you with Bessel functions?
...
Zero, which I suspect is true for most people, including the people who run small businesses.
http://mathworld.wolfram.com/BesselF...FirstKind.html

Originally Posted by Lothian View Post
It is superior because most sales are taxed at different rates
Sales taxes can be and are set at whatever levels the elected legislature approves. In my area, for example, restaurant meals are taxed but groceries are not, and medication and medical supplies are generally exempt. A sales tax can be shaped for specific purposes. But that's a feature, not a bug.

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Old 9th October 2019, 03:44 PM   #8
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Originally Posted by Bob001 View Post
As I understand it, a value added tax is a tax on the difference between the sales price of a product and the cost of producing it.
I'm not sure I understand your terminology there... but the idea is to only tax the net value being added in that step. The intention is to avoid redundant taxation by hitting every pricepoint in a multistep production.



Originally Posted by Bob001 View Post
Somebody buys flour, water and yeast and sells bread; he pays a tax on what he made from the bread, minus the cost of his materials and overhead. A sandwich shop slaps ham and cheese on a couple slices of bread, and is taxed on the price of the sandwich minus the cost of the bread, ham, cheese, labor, etc.

Many countries use VATs, and it has often been suggested for the U.S. How does it work in practice? How are costs allocated in something as complex as a car or a house? How complex is the record-keeping? What is the potential for fraud? Why is it superior to a basic sales tax, where most sales are taxed at the same flat rate? Etc.
Here in Canada, it works about as well as can be feared in that it's a tax and everybody hates it.

In the example of a house, we tax a new house from the builder, but not the purchase of a house from a previous owner.

The record keeping is not complex. You're either a business that modifies the object, or you're a business that resells it unchanged.

The alleged superiority to a retail sales tax is that it only taxes the work done in this step of production, rather than being applied over and over at every step in the supply line.
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Old 9th October 2019, 07:06 PM   #9
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Originally Posted by Bob001 View Post
As I understand it, a value added tax is a tax on the difference between the sales price of a product and the cost of producing it.
I am an Australian tax lawyer. VAT is called GST (Goods and service tax) in Australia. There are different ways of calculating GST (VAT) depending on which country you are in. One of the biggest court cases in the history of the UK was whether VAT-free bread suddenly attracted VAT as it was iced like a cake.
https://www.icaew.com/archive/about-...the-difference

In essence, personal income tax came in, in the UK during the Napoleonic war. Prior to that all tax was VAT or poll tax or asset tax.

The logic is that, if you have many different sorts of tax, that the economy will behave as though no one tax existed and therefore become more efficient. Australia only introduced GST on everything ("ish")in the 1990s which suddenly was able to tax the cash economy and thus made enormous revenue for the Australian government.
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Old 9th October 2019, 09:07 PM   #10
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Originally Posted by Lothian View Post
6 countries use the VATs, Egypt, Suriname, Brazil, Angola, Serbia and Russia.
There's also a region of Scotland which technically imposes VAT. However, as it adds nothing of value, no tax money is raised.
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Old 9th October 2019, 09:31 PM   #11
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Some economists have considered a Progressive VAT, in which you would pay a much higher rate for larger purchases.
It makes a lot of sense to me.
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Old 10th October 2019, 12:54 AM   #12
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Originally Posted by Bob001 View Post
As I understand it, a value added tax is a tax on the difference between the sales price of a product and the cost of producing it. Somebody buys flour, water and yeast and sells bread; he pays a tax on what he made from the bread, minus the cost of his materials and overhead. A sandwich shop slaps ham and cheese on a couple slices of bread, and is taxed on the price of the sandwich minus the cost of the bread, ham, cheese, labor, etc.
Is VAT really that complicated? Do you have to calculate the gross profit on every item you sell? Does your business have to exempt VAT on sales made to other businesses? The compliance costs must be enormous!

Australia's GST system is much simpler. Other than for certain items like food or rent, GST is applied to everything at the same rate. If your business buys raw materials from another business, it still has to pay GST on the purchases but that GST paid becomes an "input tax credit" which reduces the final GST bill. If your input tax credits exceed the total GST payable on your sales then the ATO will actually refund you the difference.

GST has been criticized for the "churn" it generates and the potential it has to create temporary cash flow problems since you have to wait befiore you get your input tax credits but it still seems superior to the system you describe.
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Old 10th October 2019, 01:00 AM   #13
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Originally Posted by Leftus View Post
The constitution only permits income taxes. Also, Article 1 section 9 clause 5 might forclose on the idea directly.

Clause 5: No Tax or Duty shall be laid on Articles exported from any State. So interstate VAT is expressly forbidden.
I wonder.

Does a car manufactured in Detroit suddenly become tax free if it is sold in New York instead of Michigan?
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Old 10th October 2019, 01:09 AM   #14
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The way GST works in Australia is that most things* an organisation sells attracts 10%GST. On a Tax invoice the GST charged can be shown or "GST included" stated. If the buyer is another organisation then they note the GST.
Every quarter (depending on the organisation) a BAS is done. This is when the organisation tells the ATO
1. GST on sales
2. GST on purchases
3. PAYG tax withheld
4. Sometimes other things

The amount of tax due is then calculated and paid to the ATO.


Complications. Some organisations are not registered for the GST. This means that there is no GST on anything sold by them. But if these are then sold there is a 10% GST on the entire amount.
*Some items such as basic food items do not attract GST.
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Old 10th October 2019, 01:32 AM   #15
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Originally Posted by Bob001 View Post
As I understand it, a value added tax is a tax on the difference between the sales price of a product and the cost of producing it. Somebody buys flour, water and yeast and sells bread; he pays a tax on what he made from the bread, minus the cost of his materials and overhead. A sandwich shop slaps ham and cheese on a couple slices of bread, and is taxed on the price of the sandwich minus the cost of the bread, ham, cheese, labor, etc.

Many countries use VATs, and it has often been suggested for the U.S. How does it work in practice? How are costs allocated in something as complex as a car or a house? How complex is the record-keeping? What is the potential for fraud? Why is it superior to a basic sales tax, where most sales are taxed at the same flat rate? Etc.
It's not too onerous.

I charge my customers VAT on the full price of the goods and services I provide to them. They pay the VAT to me and I in turn pay it to the government.

My suppliers charge VAT on the goods and services that they provide to me. I can claim back the VAT paid.


Businesses small and large seem to manage quite comfortably here.
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Old 10th October 2019, 01:55 AM   #16
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Originally Posted by The Don View Post
It's not too onerous.

I charge my customers VAT on the full price of the goods and services I provide to them. They pay the VAT to me and I in turn pay it to the government.

My suppliers charge VAT on the goods and services that they provide to me. I can claim back the VAT paid.


Businesses small and large seem to manage quite comfortably here.
That's the way I thought VAT operated - just like the GST.

Originally Posted by rjh01 View Post
Complications. Some organisations are not registered for the GST. This means that there is no GST on anything sold by them. But if these are then sold there is a 10% GST on the entire amount.
Not quite. If a supplier is not registered for GST then they can't add GST to the price of their product. Worse, when your business pays them, you are supposed to deduct tax at the maximum marginal rate and send it to the ATO.

In the early days of GST, I would sometimes get invoices from a supplier who didn't quote their ABN. When I pointed out the tax rule to them they would invariably give me an ABN quick smart!
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Old 10th October 2019, 06:55 AM   #17
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Originally Posted by psionl0 View Post
I wonder.

Does a car manufactured in Detroit suddenly become tax free if it is sold in New York instead of Michigan?
There couldn't be a federal VAT or sales tax is the point. There is nothing stopping the states from enacting a VAT besides competition.
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Old 10th October 2019, 06:59 AM   #18
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Originally Posted by Lothian View Post
6 countries use the VATs, Egypt, Suriname, Brazil, Angola, Serbia and Russia.

VAT is used in dozens of countries.
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Old 10th October 2019, 07:03 AM   #19
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Originally Posted by psionl0 View Post
I wonder.



Does a car manufactured in Detroit suddenly become tax free if it is sold in New York instead of Michigan?
No, it just means that New York can't charge you a fee to transport the car across state lines in order to sell it.

Basically it prohibits states from getting into the kind of trade war Trump has started with China.

You still have to pay whatever taxes in the state where you make the sale, but the state can't charge you extra for bringing in the goods.
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Old 10th October 2019, 07:46 AM   #20
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Originally Posted by Leftus View Post
There couldn't be a federal VAT or sales tax is the point. There is nothing stopping the states from enacting a VAT besides competition.
Interesting. Article 1 Section 8 of the US Constitution says,
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
That would appear to open the door for a federal VAT but I guess that is a matter for the lawyers to enrich themselves over.
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Old 10th October 2019, 08:12 AM   #21
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Originally Posted by psionl0 View Post
Interesting. Article 1 Section 8 of the US Constitution says,
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
That would appear to open the door for a federal VAT but I guess that is a matter for the lawyers to enrich themselves over.
Article 1, Section 9, clause 4

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.


The income tax had to be made constitutional by an amendment. It was ruled to be a direct tax. A VAT would also be a direct tax and would either need to be apportioned OR a new amendment.
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Old 10th October 2019, 09:08 AM   #22
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Originally Posted by Leftus View Post
A VAT would also be a direct tax and would either need to be apportioned OR a new amendment.
Wrong. VAT is the very definition of an in-direct tax because it is levied on goods or services instead of directly on incomes or wealth.

See also https://in.finance.yahoo.com/news/ba...064840748.html
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Old 10th October 2019, 10:56 AM   #23
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Originally Posted by psionl0 View Post
Wrong. VAT is the very definition of an in-direct tax because it is levied on goods or services instead of directly on incomes or wealth.

See also https://in.finance.yahoo.com/news/ba...064840748.html
https://www.investopedia.com/terms/d/directtax.asp

Other types of direct taxes include estate taxes, gift taxes, value-added taxes (VAT), and sin taxes.


VAT is not levied on the goods. It's levied on the services. The value that is added. It's paid at the end on the line, but the assessment is done on the services done to the product in question.

Per the Supreme Court (FERNANDEZ v. WIENER) - clearly distinguishable from a direct tax, which falls upon the owner merely because he is owner, regardless of his use or disposition of the property.

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Old 10th October 2019, 12:32 PM   #24
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Originally Posted by Leftus View Post
From the same source: https://www.investopedia.com/terms/i/indirecttax.asp
An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product.
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Old 10th October 2019, 01:10 PM   #25
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Ok, I was being flippant in my first post but there are some errors here that need correcting.

Originally Posted by Matthew Ellard View Post
One of the biggest court cases in the history of the UK was whether VAT-free bread suddenly attracted VAT as it was iced like a cake. [/color]
https://www.icaew.com/archive/about-...the-difference
No, the argument was whether it was a chocolate biscuit (subject to VAT) or a chocolate cake (VAT free)
Originally Posted by Matthew Ellard View Post
... personal income tax came in, in the UK during the Napoleonic war. Prior to that all tax was VAT or poll tax or asset tax.
No VAT (TVA) origins was in France in the 1950s

Originally Posted by theprestige View Post

You still have to pay whatever taxes in the state where you make the sale, but the state can't charge you extra for bringing in the goods.
Wrong. Import VAT is an important part of the system. Otherwise you are disadvantaging domestic suppliers.

Originally Posted by Leftus View Post

Other types of direct taxes include estate taxes, gift taxes, value-added taxes (VAT), and sin taxes.
VAT is not a direct tax

Originally Posted by Leftus View Post
VAT is not levied on the goods. It's levied on the services.
No VAT is levied on both

Originally Posted by Leftus View Post
The value that is added. It's paid at the end on the line, but the assessment is done on the services done to the product in question.
No, it is paid at each stage in the production chain.

Last edited by Lothian; 10th October 2019 at 01:11 PM.
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Old 10th October 2019, 05:09 PM   #26
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Originally Posted by Lothian View Post
No, the argument was whether it was a chocolate biscuit (subject to VAT) or a chocolate cake (VAT free)
"No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury and standard rate VAT at 20% is added to the price. Mcvities, the market leaders for Jaffa Cakes added chocolate"

Read the case.

Originally Posted by Lothian View Post
No VAT (TVA) origins was in France in the 1950s
"A tax imposed on the sale of goods is depicted on the walls of ancient Egyptian tombs, which have been dated as far back as 2000 BC. These paintings describe the collection of tax for specific commodities, such as cooking oil"

Read the history of taxation. Roman tax included VAT.
Centesima rerum venalium
https://en.wikipedia.org/wiki/Centesima_rerum_venalium

Last edited by Matthew Ellard; 10th October 2019 at 06:08 PM. Reason: Added link to Roman tax
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Old 10th October 2019, 05:54 PM   #27
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Originally Posted by Lothian View Post
Wrong. Import VAT is an important part of the system. Otherwise you are disadvantaging domestic suppliers.
You're confused. I'm referring to the US rule against interstate import taxes within the US. My post was not about VAT.
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Old 10th October 2019, 10:56 PM   #28
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Originally Posted by Matthew Ellard View Post
"No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury and standard rate VAT at 20% is added to the price. Mcvities, the market leaders for Jaffa Cakes added chocolate"

Read the case.
I know the case well and my summary is correct. You said it was about bread and cake icing made it taxable. That is wrong. Cakes are generally tax free. Chocolate biscuits are not. To win the case there was reliance on biscuits going soft after time and cakes going hard. They also brought in a large cake size Jaffa cake

Quote:
"A tax imposed on the sale of goods is depicted on the walls of ancient Egyptian tombs, which have been dated as far back as 2000 BC. These paintings describe the collection of tax for specific commodities, such as cooking oil"

Read the history of taxation. Roman tax included VAT.
Centesima rerum venalium
https://en.wikipedia.org/wiki/Centesima_rerum_venalium
Your link refers to a straight 1% sales tax. I am sure there have been other versions in the past but VAT in its current form with input tax deduction is widely considered to have been invented by Maurice Lauré.
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