[jamestnz]

>A tax on revenues would kill a lot of high growth businesses

And also low-margin businesses. If you tax a business on its total sales rather than profits, a low-margin and high-volume operation cannot survive as easily.

Example. A supermarket chain makes many sales, collecting average 5% margins on a sale. A seller of high-end automobiles moves fewer units, but can take a 15% margin. Assume both businesses make the same $1m sales in a year.

If you're taxing profits at 20% the supermarket pays $10k on $50k profit while the car dealer pays $30k on $150k profit, for a total tax take of $40k.

If you're instead taxing total sales at 2%, each will pay $20k on their $1m sales. The same total taxes were raised, but the tax burden (at least in terms of retained earnings that are now available for reinvestment) has fallen differently. The supermarket is paying 40% of their profits in taxes, the car dealer is paying 13.3% of their profits in taxes.

And if a business makes only 1% average margin on their sales, they are underwater by this scheme. ($1m sales, $10k profit, $20k tax).

[skybrian]

A VAT isn’t a sales tax though. I think you can subtract the cost of goods since they were already taxed? Compared with income tax, there are fewer expenses you can subtract from revenue, but there still are some.

But since prices will adjust, the question is really one of tax incidence. Who gets to raise prices to cover their taxes? And that’s complicated.

[thethimble]

You can subtract the cost of goods but you can’t subtract operating expenses like R&D.

[Hamuko]

I think you can subtract R&D costs somewhere else. At least I remember the accounting department being really picky about having accurate details on R&D hours.

[geysersam]

Don't know about US VAT system, but for VAT in Europe expenses such as salaries etc are deductable.

[edanm]

Not out of VAT though. They are deductible from your income, which is how you come up with how much profit you made (which is taxed).

With VAT, you can deduct from it all the other VAT that you paid. E.g. you bill someone 100 + 10% VAT for a total bill of 110. You receive 110. You are now supposed to pay that 10 VAT to the government. But before you pay it, you can subtract the VAT that you paid in the last month, so if you bought, say, scissors, that had a VAT of 2, and a pencil, with a VAT of 1, you have to pay a total VAT of 7 back to the government.

[skybrian]

I hadn’t heard of this. Where can I read more about it?

[mr_toad]

VAT is a sales tax, and you can only subtract the cost of goods sold, not any other expenses.

Not being able to subtract the cost of goods sold would be ludicrous and farcical.

[skybrian]

In the US, sales taxes don’t have any deductions. Some things aren’t taxed, though. It seems like an important difference.

[Retric]

That’s assuming there is competition from companies that can avoid the tax, otherwise their margins stay the same and the industry ends up with higher prices. In effect it’s roughly equivalent to sales tax, though one that also applies to suppliers and therefore promotes vertical integration.

Which is the real reason countries tax profits, it can’t be passed on to consumers. Aka a company that maximized profits at some price point can’t raise prices without lowering profits.