VAT - consumption tax

WHAT DISTINGUISHES EXCISE DUTIES FROM VAT?

(1) an excise typically applies to *narrower range of products*. (2) an excise is *typically heavier, accounting for a higher fraction of the retail price of the targeted products*; (for the average pack of 20 cigs, tobacco duties amount to 59% of the price) and (3) an excise is typically a per unit tax, costing a specific amount for a volume or unit of the item purchased, whereas a VAT is an "ad valorem" tax and proportional to the price of the good. *WHAT IS A TYPICAL EXCISE DUTY PRODUCT TO TAX*? - excise duties are taxes imposed on alcohol, imported composite goods containing alcohol, tobacco products and pollutants generally. *WHY ARE EXCISE DUTIES SO HIGH/JUSTIFIED?* - specific taxes on these goods are justified by the costs their consumption imposes on other externalities and/or costs on the consumer themselves that they may not fully take account for when making their consumption decision (INTERNALITIES). Taxes should seek to target the *externality* - or *internality* - generating activity and should be *set based on the incremental social harm associated with consumption.* - average pack of cigs, tobacco duties amount to 59% of the price In *Scotland, the tax has just changed with regards to the minimum price on alcohol. Will not be allowed to sell for less than 50 pence per unit.* ......... - first country in the world to introduce a minimum price on alcohol - Alcohol-related deaths in Scotland are over 50% higher than in England and Wales - University of Sheffield research conducted in 2016 which estimated price of 50p per unit could cut alcohol related deaths by 60 in the first year and 120 by year 20 of the policy. - Hospital admissions could fall by 1300 in the first year and 2000 by year 20. Financially, the saving from harm reduction could be as much as £942M per year. Analogy with fast cars slowing down at a crossing - *the driver isn't stopping simply because of the red light. they stop due to a combo of forces.?* A foot on the brake the friction of the road on the tyres as well as the speed limit. We also have various cultural factors that exert a certain gravity over a motortist's thinking and behaving as well, like the fear of getting points on a licence for using a phone or drink driving - of course, *these rules will never eliminate dangerous driving, and many safe drivers will feel put-out, believing such rules should not apply to them but the cumulative effect of all these factors is safer roads for everyone...* - what this goes to show is that while alcohol comparably won't solve the problem of alcohol misuse, it will play a significant part. ........ taxation can *discourage excessive consumption* that would occur in the absence of taxation causing price increases this shows. - to prevent externalities on others damaged by an individual's consumption of something harmful and polluting; and on the consumer in the future - the effects that come with the consumption of such a product (internalises). - These taxes are known as *corrective or pigouvian taxes* Externalities and Internalities include passive smoking, health care costs that affect everyone through publicity funded health services treating smokers, alcohol consumers and pollutant related diseases. *the case for taxing is to discourage socially harmful consumption by aligning the perceived private marginal costs of an activity with its actual social costs. Unlike VAT, excise duty places the *alignment of internality/externality with the full marginal cost first*, while *raising revenue is seen as subordinate to this*; however it may raise revenue too. there has been a long term fall in smokers. *Increases in tobacco duties*, *revenues from tax duties are expected to fall*. this is arguably not a problem given the "mission will be accomplished" of excise duties, the internalises and externalities will subsequently be reduced and the money saved from this will be beneficial from then onwards. ONS suggested males over 16 went from 51% smoking in 1974 to just 22% in 2013. With substitutes such as vaping, health risks becoming more universally known, the age of purchase having gone from 16 to 18, smoking in public places being banned and plain packaging being introduced with health warnings it is likely this will continue to reduce. - if this is the case, and people stop, when there is no alternative to smoking that is as expensive, except for vaping which has seen an increase; the alternative to alcohol is drugs. And this referring to both the addict and the recreational usage. When it costs £5 for 2 litres of the cheap cider and £10 for a pill of ecstasy, the heightened the chance a reckless youth is going to opt for this. Given there is no "vape"-like substitute.

PROS CONS OF VAT p, u

*BENEFIT OF VAT SYSTEM OVER TRADITIONAL SALES TAX* - is that it is *applied to all commercial activities based on the margin of the transaction*. The net income to the government is the same - it also benefits from the fact that the tax carried by the product is not built into the price until it reaches the final consumer. Up to that point, the person who has paid VAT in the acquisition of the product can claim it as a *credit* - either *against VAT he collects on subsequent sale, or by repayment from the tax authorities.* *PROS* (1) - *incentives to evade VAT for any individual firm are lower relative to a final sales tax*: *the amount of tax due from the firm is based only on its own value added rather than the full sale price*, meaning the *tax that can be evaded is reduced.* (2) - A further advantage of VAT over a single stage retail tax is that goods are generally circulating with at least some VAT having been accounted for in their process of production, so if VAT is fraudulently acceded at some stage, some VAT will have been accounted for at least. - In contrast, with a single stage tax, if the tax is avoided at that single stage, *no tax will be collected at all* (3) *Unlike for a sales tax, there is no need for a seller to distinguish between whether a customer is a final consumer or a business*: VAT is charged on the sale regardless (though, a registered business can then reclaim or offset that VAT against his own liability). - in the case of RST sellers have little incentive to draw such a distinction accurately, *meaning errors or deliberate misclassification* *(either on part of the buyer or collusively) may affect both tax revenues and incidence* - In contrast, *under VAT, evasion of the tax requires omission or under-valuation of the same firm accounting records.* - this is hard to achieve. - VAT is commonly implemented via *self-assessment*, and using *invoice credit approach*. To claim a deduction for input VAT, firms require an output VAT invoice from their supplier. This gives an incentive for purchasers to encourage compliance by their supplier. This gives an incentive for purchasers to encourage compliance by their suppliers and the symmetric invoices provide a useful *audit trail* for tax authorities, allowing them to check that deductions have a correspondence payment. Indeed *some revenue authorities require firms to submit details of their transactions with different suppliers and customers* (sometimes above a certain sales threshold) in order to collect such data automatically. *CONS* (1) usually rather *regressive* tax. Most of the tax that is generated by VAT comes from those who can least afford to pay them. The *poorest % of socioeconomic system tend to pay higher overall % of their incomes to the VAT than their wealthier counterparts*. - it was found that the *lowest 10%* of earners pay an average of 42% of their income in the form of taxes including VAT. The *poorest pay 12.5% of their income to VAT* in the form of VAT amongst other taxes. - In contrast, the *richest 10%* see roughly 34.4% of their earnings go to the tax man. And, of this, *5% to VAT*. - there are ways that VAT tries to alleviate this burden on the poorer in society, by having a *zero-rate* on children's clothing for example. *Yet, these are cheaper for everyone*. Instead, the government could *raise revenue by increasing rates or by reducing the scope of the zero and reduced rates, while also compensating the losses of particular groups* i.e. the *poorest in society, in a more direct way* (2) In that each entity involved in commercial activities must maintain accounting of the gross margin for each product. There is the argument that is is an *administrative burden to businesses*. - When a VAT is added, it changes the retail price point of every item and service that is offered. The VAT would need to be calculated for every step of the process that it takes to create a product or offer a service. - Then, these added costs would be put into the final product price, which causes the consumer to pay for all the added taxes. Then the consumer has a final VAT that they must pay when finalising their purchase. However, this *is arguably the sacrifice we make for an overall more efficient tax system where evasion is less easy to commit, an advantage of VAT.*

CAN VAT OPERATE EFFECTIVELY IN CROSS BORDER ENVIRONMENT? P, U

*given that most countries use VAT, operating VAT in a cross border environment is generally successful and efficient.* *zero rating* versus *exempted* - *ZERO-RATING* refers to situation in which the rate of tax applied to sales is zero, though credit is still given for taxes paid on *inputs*. In this case the *firm will be due a full refund of taxes paid on inputs.* in a VAT designed to tax *domestic consumption only*, *exports* are *zero-rated*, meaning the *exports leave the country free of any VAT*. This is consistent with the *DESTINATION PRINCIPLE* which is the *international norm*: it *requires that the total tax paid on a good* be determined by the *rate levied in the jurisdiction of its final sale* with revenue accruing to that jurisdiction. - In contrast, the *ORIGIN PRINCIPLE* requires that tax be *paid at the rate of, and to, the country or countries in which the item is produced* rather than consumed - *EXEMPTION* is quite different to zero-rating in that, while tax is again not charged on outputs, *tax paid on inputs cannot be reclaimed* - thus, no refunds are payable. In this case, *because tax on intermediate transactions remain unrecovered*, *production decisions may be affected by the VAT* *Should goods be zero rated?* - *YES* - i agree zero rating is a good method of lessening socio-economic implications on the poorer in society, namely by a lot of food products being zero rated. - this saves a lot of money for the manufacturer if zero-rated goods have been used and subsequently the consumer. This therefore incentivises manufacturing. this method of VAT has the positive effect of helping to *offset distortions that can come from taxing too highly income and certain goods and services.* - for example, by having a zero-rate on home prepared food products, books and children's clothing. - Taxing VAT, and *therefore taxing less income reduces the disincentive of working*, or the *displeasure of having to work more to equal your desired wage to fund your lifestyle* - hence why it is called an *indirect tax* - it also *effectively charges the same amount of money per person, depending on their lifestyle choices*, but in a way that is not so direct and therefore not hard hitting.

HOW TAX WORKS GENERALLY P, U

- current rate, 20% - *Article 97* of the VAT directive sets the *minimum EU member countries at 15%* with *no maximum*. (and, a tax rate for supplies for goods and services of at least 5%). - VAT is called a consumption because it is *paid by the consumer* using the *value of the product*. - it is also called an *indirect tax* because it is collected from an entity (the seller) other than the end user who pays the tax. - VAT *differs from a sales tax* in that a *VAT is assessed at each stage of the production process as a percentage* of the *value added to the product* - it is a *multi-stage tax* these stages may include raw materials, manufacturing, wholesale and retail. - On the other hand, a *SALES TAX* is usually levied only on the end product. For example, if a sales tax of 10% is applied to a desk worth £1000, then the end customer buying the desk from a desk retailer would pay £100 in sales tax and £1000 to the desk retailer. - *All other entities involved in each stage of producing the desk would pay no tax.* - *If a VAT of 10% is applied to same desk, the end customer will pay £100 in VAT* - If the desk builder has purchased wood and supplies for the desk totalling £400, *he/she is thus assessing £600 of the value that he/she has added in creating the desk.* The desk builder would pay 10% of VAT of £40 on the supplies. When he/she remits payment of the VAT to the government, he/she will remit total VAT assessed on the end value of the desk (£100) minus what he/she has already paid £40, to total £60 based on the added value. In effect, *each stage of the production process pays only the tax applicable on the value added by that entity.*

WHY DO EXCISE DUTIES RAISE DIFFERENT ISSUES THAN VAT?

- excise duties are another form of consumption tax utilised in the UK - they are another *indirect tax*, meaning that the *producer or seller who pays the tax to the government* is *expected to try to recover or shift the tax by raising the price paid by the buyer.* Typically imposed in addition to other indirect tax, in UK we have in addition to VAT.

WHY NOT A RETAIL SALES TAX (comparison of VAT and RST) P

- single stage tax levied in principle at the point of sale of the final product, the RST may appear to be *a simpler way of achieving the same effects - preserving production efficiency - as a VAT.* - the RST is much more *vulnerable to evasion*. We avoid this in VAT by collecting at many points under VAT rather than simply at the final stage under the RST. - Selling chair for example, why do we not just get the retailer put a tax on when they buy the chair - an RST? A lot *simpler* than and *economically identical to a VAT* - why has every country not done this? (Except US)? - *Commonly said that you don't lose all the tax if someone cheats using VAT*. - people could *categorise as not selling through retail* and therefore a *wholesale as a business to avoid paying the RST*. *However could then create a wholesale sales tax* - This would be far-fetched and therefore in total, it is clear that VAT is a better system

WHY HAVE SO MANY COUNTRIES ADOPTED VAT? P

Sandford's consumption tax - all *OECD* countries except the US have now adopted VAT, or are about to do so. - it continues to spread through developing countries most recently sub-Saharan African countries have adopted VAT, are about to, or are considering. - Undoubtedly the *spread of VAT* has been *hastened by the requirements of international groupings and the advocacy of international agencies*. There may have even been a *bandwagon effect* - *of keeping up with the Joneses*; would be wrong to advocate this to the effect of introducing VAT in developing countries where in Ghana, VAT had to be withdrawn because of the opposition and in developed countries such as Canada, opposition was intense, there became somewhat a constitutional crisis and the government introducing it suffered a catastrophic defeat in the subsequent general election - *original 6 members of the EEC* (European Economic Community) meant *other countries wishing to adopt VAT as the community's general sales tax meant that other countries wishing to join the Community had perforce to follow suit*. *some say irrespective of EEC they would have adopted VAT (UK).* *Sweden had VAT before any intention to join the EEC suggestive that it was generally a desirable system.*

IS THE VAT A PARTICULAR EFFECTIVE AND EFFICIENT TAX? P, U

has it raised more revenue than sales tax that it replaced? - performance of a tax is gauged by *more than just the revenue it raises.* - Must also be assessed in terms of the *efficiency* and *fairness* with which it raises that revenue, and the *costs incurred by government and taxpayer in doing so*. - A vital question is whether it has raised more revenue than the predecessor tax: - for the first few years the VAT is often intended to be revenue neutral. As development proceeds can expect a positive change. *Utilising a survey in selected African countries it was shown the average % of GDP increased by 1% from the predecessor sales tax*. Thus, on average it can be said that VAT raises more revenue than its predecessor sales tax. *EFFICIENCY GAINS FROM VAT* - performance is more than just raising revenue. Case for VAT rests upon the view that a *well designed* and *implemented VAT* is a particularly *efficient tax*. - it is however *difficult to quantify efficiency of adopting VAT generally* - However, a way of looking at the efficiency of VAT is to look at the relatively *low efficiency cost* of raising revenue by VAT. One possibility that the government with a VAT raises more total revenue by a VAT. - this could be investigated by looking at the variation in the ratio of tax revenues - for all taxes, not just VAT - to GDP between those countries with and without a VAT. - this enables the effects of the VAT to be investigated empirically without specifying any particular alternative: the question asked is not whether VAT is preferable to alternative kinds of sales tax, or trade taxes, or an expanded income tax, but rather !!!!!!!*whether the addition of a VAT to the armoury of instruments as the disposal of the authorities' appears to improve the overall efficiency of the tax system*!!!!!!!! - there are two additional effects associated with the higher real income presumably due to using a more efficient tax: (1) if public expenditure is a normal good, the desired level of its provision will rise, pointing to a higher tax ratio (2) with an *expanded tax base, any given level of expenditure* can be financed with a *lower tax rate*, pointing to a *lower ratio of tax revenues to GDP*

SUGAR TAX

we have a sugar tax now on drinks. 18p per litre if the drink has 5g of sugar or more per 100ml 24p per litre if the drink has 8g of sugar or more per 100ml the effect this has had is sugar contents of certain drinks have reduced, notably *10.3G to 4.7G in irn bru* - problem is there is *not a sugar tax on foods* at the minute. Also, while sugar is being reduced to avoid paying so much in sugar tax, more unnatural substitutes such as *aspartame*. The problem with this is that these also have negative effects, some argue it can increase the chance of cancer, weight gain, seizures and depression. LUCOZADE reduced its sugar content and this affected the type 1 diabetes community considerably. The issue with this being that their reliance on Lucozade to increase their low blood pressure will become twice as costly given that the sugar content has reduced from 17g to 8.9 per 100ml. Those with type 1 generally need more than 8.9. A sugar tax quite similar to an excise duty. It is taxing in a way that is placing the internality of consuming sugar first, and the raising of revenues subordinate to this. Excessive sugar consumption is linked to *heart disease* and *type 2 diabetes* - according to *national diet and nutrition survey, the average teen consumes three times more sugar than recommended, as a share of total calories, those which are not naturally present in food.* Problem with the sugar tax is that it is only drinks. If people choose a milkshake (because a certain level of milk exempts the milkshake), a chocolate bar, a cake or ice cream instead of a can of fizzy juice, then the impact of the sugar tax will be reduced.