VAT and sales tax

I was a kid back in England when VAT was introduced. 12.5% if I recall correctly. It was supposed to inflation-neutral, because many "essentials" were exempt. It wasn't, it was massively inflationary, and how could it not be. It added 12.5% to the cost of almost everything.

Also, my father ran his own small business, and (as has been mentioned above in this thread) got jammed in the middle. He became his own tax collection agency, responsible for filing VAT he collected from his customers, and responsible for clawing back VAT he paid to his suppliers. Everything was always out of sync, causing him to have to carry a line of credit just to deal with VAT issues (then they jammed interest rates through the roof to control inflation, but that's another rant).

VAT is insidious as, over time, it gets forgotten as it's hidden in the price you pay. It's not charged separately at the register, it's built in from the factory to the consumer. That way, once you get used to paying it, they can tweak it up a notch from time to time. Then you find out, like the UK did when VAT had already crept to 17.5%, that they plan to bump it to 21.5%. That happened a little while back, and the govt. in power at the time got its hat handed to them in the next general election.

I fully understand that revenue needs to be generated by the government and that, as a relatively well-off dude, I have to pay my share and perhaps then some, but VAT is not the way to go. It's underhanded and designed to fool people into being unaware of just how much tax they are paying.

One last comment for travellers to the UK. If you buy anything of notable value - get a VAT receipt!! You too are paying the hidden tax, but if you are taking the goods out of the country, you can collect it all back! Nice, eh? Just take your VAT receipts to the Customs and Excise window at the airport, and they will give you cash (in sterling) or credit your credit card. The VAT return is the equivalent of a 15% discount. It adds up!

One reason is that the VAT (at least as it works in Europe) shifts the burden of tax accounting and payment from the single company that sells the product to the end user to all the companies involved in the supply chain. This grossly increases the amount of tax accounting done by manufacturers and other biz-to-biz sellers and in many cases requires that these businesses pay VAT due to the government before they actually receive payment from their customers. Under our current system manufacturers and wholesalers are generally immune to any sort of sales tax payment or accounting. Under a VAT they would have just as much or even more burden for accounting and paying the tax as a retailer does under our current system.

I do business both here in the US and in Europe and have to live with both systems. The EU VAT system is a complete pain-in-the-ass when it comes to paperwork and pre-payment of VAT on certain transactions. However, it's nearly impossible to cheat in a VAT system. LOTS of companies and individuals in the US cheat on their sales and use tax payments. It's very easy to do and is becoming more and more of an issue with the increasing inter-state sales done over the internet. One advantage/disadvantage of the VAT (depending on which side of the transaction you're on) is that you can't avoid the tax just by buying something mail order. My personal opinion is that VAT is the fairer system even given the burden it places on businesses up the supply chain. Originally Posted by Mazomaniac

Mazo, merci beaucoup! that's a fantastic comment. took me quite a while to parse it and fully understand it, because i'm internally mostly euro-trash, while your POV it that of an American. but once i "got it" i realized we have almost the same perspective.

And true, esp. since most EU memberstates implemented a reverse-charge VAT (or as the french call it l'autoliquidation de la TVA) tax cheating is quite hard to do these days.

One last comment for travellers to the UK. If you buy anything of notable value - get a VAT receipt!! You too are paying the hidden tax, but if you are taking the goods out of the country, you can collect it all back! Nice, eh? Just take your VAT receipts to the Customs and Excise window at the airport, and they will give you cash (in sterling) or credit your credit card. The VAT return is the equivalent of a 15% discount. It adds up! Originally Posted by Snorwood

This does not only apply to the UK but to all EU VAT and also to Swiss VAT (however the the refund process is slightly different in different EU countries. Not fully harmonized, AFAIK.)

In the nordic countries VAT is up to 25.5%, so the refund can indeed make a difference.

The VAT would be a federal tax, so state sales taxes would remain. Originally Posted by CaptainMidnight

ouch! sales taxes plus a scandinavian-style 25% VAT would be hefty.

It's also a "hidden tax" in that it's simply built into the price of a product. Unlike the sales tax with which we're familiar, the VAT would not be added on at the register for everyone to see. Originally Posted by CaptainMidnight

VAT is insidious as, over time, it gets forgotten as it's hidden in the price you pay. It's not charged separately at the register, it's built in from the factory to the consumer. Originally Posted by Snorwood

This not fully true. Yes, at the consumer / small business level prices are incl. VAT. However the VAT is still shown separately on the invoice bill / receipt.

e.g. take this example: http://en.wikipedia.org/wiki/File:ReceiptSwiss.jpg

Notice the line, there it says: "Incl. 7.6% MwSt. 54.50 CHF: 3.85"


And at the wholesale / distributor / B2B level prices are usually excl. VAT anyway.