[lalaland1125]

> What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process.

To add some further context that helped me understand VAT:

Sales taxes are great, with minimal dead weight loss and distortion, but have the downside of encouraging black markets since it's easy to avoid reporting final sale transactions.

VATs are designed to be mathematically the same as sales taxes, but robust to black markets. The sales tax is captured on the manufacturing end, which is much harder to avoid reporting for a variety of reasons.

[cafard]

Sales taxes have the disadvantage of being regressive: the less prosperous spend a relatively larger proportion of their income on taxable goods. There are states that offer deductions from income tax for sales tax paid on food and perhaps other items, but as I recall it took a very disciplined filer to claim it.

[watersb]

Some states don't require tax collection at point of sale, so things like basic food or essential clothing are not charged sales tax. There's no need to apply for refund when computing personal income tax.

[thaumasiotes]

> Sales taxes are great, with minimal dead weight loss and distortion

That's not context for VAT. Or a fact. As far as deadweight loss and distortion go, a uniform VAT is the same thing as an income tax.

If you want a tax with minimal deadweight loss, you're pretty much stuck with a capitation tax.

[nroets]

VAT only reduces consumption. Income tax also reduces investment.

For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country when the beverage leaves the store. So it's really a consumption tax.

[thaumasiotes]

No, there's no difference. Whether all prices rise by 25%, or all incomes fall by 20%, the system will reach exactly the same equilibrium. When a VAT is enacted, you can model this as everyone with an income paying the corresponding income tax. (For full accuracy, you'd also need everyone with monetary holdings to pay a one-time wealth tax, but you can safely ignore this because the amount of wealth is so small relative to the amount of income.)

The effect of the VAT is to make all money less valuable. This means that people will seek to earn less of it.

> For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country

VAT is paid on all transactions; that's the whole point of VAT. You're thinking of a sales tax that exempts business purchases. As soon as the tank is purchased, its seller must pay the appropriate VAT.

[nroets]

Yes, VAT is levied on the sale of the tank by it's manufacturer. But the distiller can claim back that VAT. This continues up the value chain except for the consumer who is not allowed the claim back VAT.

https://en.wikipedia.org/wiki/Value-added_tax

[thaumasiotes]

What do you want me to read in that link?

On its face, it directly contradicts you:

> Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax). Buyers who themselves add value and resell the product pay VAT on their own sales (output tax). The difference between output tax and input tax is the amount paid to the government (or refunded, in the case of a negative amount).

Though of course a distiller isn't reselling its still; it is the final consumer of the tank.

> [example of] 10% VAT:

> At each stage of production, the seller collects a tax and the buyer pays that tax. The buyer can then be reimbursed for paying the tax, but only by successfully selling the value-added product to the buyer at the next stage.

That reimbursement comes from the customer, not the taxing authority.

[nroets]

This link explains it better. And it proves my point: VAT on capital goods (in this case helmets) bought by VAT registered businesses are effectively refunded in full.

https://taxation-customs.ec.europa.eu/taxation/vat/vat-direc...