Question for UK'ers - What the hell is VAT? Value Added Tax - how does it work,

[old mark]

do people liket it?
Seems like it would be very annoying....


mark

[Swede]

1. It's like the GST in Canada.

No one likes it.

[Hissyspit]

5. But Canada has universal health care.

I found VAT annoying when I was in Britain, but I also wouldn't have gone bankrupt if I suddenly had a traumatic health crisis experience.

[Swede]

7. It is a tradeoff I am okay with.

Taxes are a fee you pay to live in a nice place,IMHO.

[superduperfarleft]

2. Isn't it just basically a federal sales tax on top of a state or local sales tax? n/t

[Hissyspit]

4. It's like a sales tax, but spread out over the manufacture and sales chain.

http://en.wikipedia.org/wiki/Value_added_tax

Wikipedia:

Example

Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows , the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel.

Without any tax

A widget manufacturer spends $1.00 on raw materials and uses them to make a widget.
The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20.
The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30.

With a North American (Canadian provincial and U.S. state) sales tax

With a 10% sales tax:-

The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.
The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.
The retailer charges the consumer $1.65 ($1.50 + $1.50x10%) and pays the government $0.15, leaving the gross margin of $0.30.
So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.

With a value added tax

With a 10% VAT:

The manufacturer pays $1.10 ($1 + $1x10%) for the raw materials, and the seller of the raw materials pays the government $0.10.
The manufacturer charges the retailer $1.32 ($1.20 + $1.20x10%) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20.
The retailer charges the consumer $1.65 ($1.50 + $1.50x10%) and pays the government $0.03 ($0.15 minus $0.12), leaving the gross margin of $0.30 (1.65-1.32-.03).

With VAT, the consumer has paid, and the government received, the same as with sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers.

Note that in each case the VAT paid is equal to 10% of the gross margin, or 'value added'.

The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier.

Limitations to example and VAT

In the above example, we assumed that the same number of widgets were made and sold both before and after the introduction of the tax. This is not true in real life.

MORE

[superduperfarleft]

8. Thanks, that makes sense. n/t

[ieoeja]

9. VAT is also charged on services. Sales tax is not.

Hire a lawyer in the United States, and you pay no tax. Hire one in most of the world, and you do pay a tax.

[Hissyspit]

12. Thanks. I'm multi-tasking right now and missed that part.

[muriel_volestrangler]

10. Part of the advantage of a VAT over a simple sales tax

is that the tax goes to the place where the value is added at each stage, rather than just to the final point of sale. This is very useful for an area in which intermediate components (or services) are sold between countries, such as the EU.

[Hissyspit]

3. At least they get something for it - universal health care.

[eShirl]

6. I know that unless otherwise stated, the VAT is assumed to be part of the listed price of something

Second Life sure got an earful when its European customers found out the VAT wasn't already included in their membership fees.

[dmallind]

11. It's a "hidden tax"

Because unlike in the US and even Canada, prices are labeled inclusive of all taxes. Only gas that I can think of works like that here (partly for the same reason no doubt - it would shock people to see all the taxes).

[anigbrowl]

14. Speaking as a euro...

I've always been well aware of what the taxes were, and mostly didn't object to paying (although VAT really does push prices up). But I much prefer having the tax included when I go shopping, so that when I pick something up the price I see at the shelf or on the advert is the rice I am going to pay at the cash register. I've gotten used to meentally adding 10% to everything here in California, but I don't like having to recompute every number with a $ in front of it.

[dmallind]

15. I'm an (ex) Euro too

I did not mean to imply Europeans are stupid, merely that an inclusive price is both simpler and less in-your-face than separate taxation. We all know here that a 99c McDonald's cheeseburger really costs $1.08, but it's much more of a "brutal" reminder eveery time than seeing a $1.08 special advertised and knowing 9c goes to the government.

[miscsoc]

17. i am a stupid european and

can't imagine calculating taxes with every purchase. i suppose it would become automatic. i suppose whether being "brutally" reminded of tax is a good or bad things depends on what you think of that specific tax. even in america, though, you are paying a bunch of non sales taxes when you buy something - you are funding corporation taxes, income taxes of employees involved in the production of the product etc. of course in those cases it's harder to work out precisely what the consumer is "paying" to the government. maybe that applies to sales tax too, though (your sales taxes contribute to government services that facilitate production and supply, for instance, or alternatively, you could argue taxation hampers economic development and hence in some indirect way is imposing a cost on the consumer beyond that excised through the sales tax itself)

[applegrove]

13. If you are poor enough you get money back from the government twice a year.

I like it. Send your kid to the mall with $100, they pay $5 dollars of that in GST. The GST is not on food. I like it that our government pays its way and can afford programs like public health care. The current government has lowered the GST rate by 2% and they face a deficit. They shouldn't have done that.

[miscsoc]

16. it's not annoying for a shopper

since it's part of the label price, there's no calculating to be done. You're just aware that x percent of whatever you are buying is sales tax levied on the retailer. Although arguably it's quite hard to tell how much tax you're "paying", since afaik it is lobbied at various steps in the production/distribution process, and it's hard for the layman to estimate how much the price would be reduced in the absence of VAT.

it might be annoying for businesses, though. I should ask my father, who runs a small electrical business.

In general I prefer income tax to this sort of regressive tax but political realities make it necessary to engage in regressive taxation to pay the bills for essential services, the welfare state etc.

[Statistical]

18. Not a UK'er but VAT is horribly regressive.

We have a progressive tax structure.

We should be be making it MORE progressive (raise rate on 3 highest brackets, and add a new even higher bracket, treat all income the same).

We should be reducing/eliminating regressive taxes (payroll, sales, excise, etc).

VAT is a huge step in wrong direction.