I’ve heard it’s also liked among economists because it’s like.. “sound”, somehow, or “efficient” as far as taxes go? Like a lot of special taxes, tariffs, deductions have super complex side effects, kickbacks, unexpected payees and loopholes.. but as I understand VAT is relatively “sane” on paper?
But also there was something about taxing consumption that was bad somehow.. is it regressive? I don’t remember. Feels “flat”, but maybe not?
Neutral is the word. It means that the tax does not change what's the rational actions vs if the tax was not there.
And yes, it's regressive relative to income. Poor people spend all their money on essentials, paying the vat on all their income. Rich people can save most of their money (e.g in stocks), and end up paying a much smaller percentage of their income in VAT.
It should also be added that in most EU countries, essentials like food have a lower VAT rate than luxury goods, specifically as an attempt to address this.
The taxman thought of that - at least in some jurisdictions.
In my native Norway, if you are a professional and do work benefitting yourself, you are supposed to pay VAT on the value of the job you did, even if it was done after hours.
Makes me wonder if those also applies to professional chefs and cleaners. And do daycare staff need to declare time spent taking care of their own children?
No, it's only for stuff which needs 'special competency'. E.g if you are a plumber then changing gaskets are Ok (because that's something 'anyone' can do), but not bigger stuff.
Kind of but not really completely correct. It's not for professionals in general, but for self-employed professionals. And 'only' for the work which needs special competency. E.g is changing gaskets as a plumber ok, but more serious work triggers VAT.
But yeah, pretty lame rule, and I doubt many actually follows it. I think it's primarily meant for people doing house flipping.
it is regressive, it impacts small earners more than rich people, since a larger share of their income goes into direct consumption.
But many countries have different VAT brackets for different goods, e.g. in Italy at different times (I'm not sure of the current brackets) "staple" goods like bread or milk had 4% VAT, health and education had 5%, fish or meat had 10%, generic services have 22% and at some point "luxury" goods had 30%+ vat.
Yes, on paper VAT works out better, and it's a darling of economists. In practice, VAT requires more paperwork, accounting, and interaction with the bureaucracy. The end result is that even though the U.S. has the tax pyramiding "problem", you find much more tax avoidance in Europe than in the U.S. Grey and black markets constitute a huge, double-digit fraction of the European economy, and it's what helps sustain organized crime there, even in stereotypically rule-abiding Germany. Like many things in Europe, VAT works well for large enterprises; it's quite burdensome for small businesses, and that's probably where the complaints are coming from--small and medium-sized businesses in the U.S. who find dealing with EU taxation daunting.
In school (economics, law) I had learned all about how great the VAT system is. But about 10 years ago I wanted to buy a simple ~$100 rack shelf to fit a PC Engines APU from an Italian manufacturer. I had to create an Italian tax ID, which was annoying. I recently had to use it again just to buy some tins of anchovies from Italy.[1] In both cases I received more paperwork regarding the VAT than I did the import paperwork. It seems slight but it's actually quite a lot of friction compared to just giving X dollars and receiving your product. Dealing with tax and import crap is exactly why import/export companies exist, creating needless intermediaries that siphon value.
In that light, the "inefficient" sales tax premiums we pay in the US can be interpreted as the cost of enjoying a more decentralized taxation system that makes compliance more convenient and transactions run smoother. There's less accounting and--more importantly (because US accounting can be complex, too)--less coordination required. It's the economics version of worse is better.
[1] And just to be clear, in both cases I was purchasing through a clearly retail-oriented store website. IOW, even as an effectively retail consumer you had to provide a tax ID--the equivalent of an employer ID or social security number in the US. I don't know if this is a hard requirement for retail generally in Europe, or just the easiest way for them to deal with VAT accounting on their end when only a small portion of their business is retail.
I'm in the US so didn't have a VAT ID. Plus, I originally wasn't trying to purchase it as a business, and the businesses I was purchasing from do sell to individuals, it's just that apparently they wanted even individuals to provide a [personal] tax ID. Though, to get the Italian tax ID I believe I did have to register using an American business entity. (I can't remember, and apparently because of the strict privacy laws AFAICT there's no online database where I can query my Italian tax ID to see what name it's registered to, or even whether it's registered to a business or individual. It's somewhat understandable, but at least in the US the government provides an online service that can confirm whether a name matches a tax ID.)
But also there was something about taxing consumption that was bad somehow.. is it regressive? I don’t remember. Feels “flat”, but maybe not?