On the Other Hand...

by Jim Davies

Beware the Vicious V.A.T.


VAT - Value Added Tax - has been around in Europe for two decades, but here we have so far escaped. We need to know now what it's about, so that when the Pols try to thrust it down our throats, they'll meet the resistance deserved.

An example of government duplicity came from Margaret Thatcher, in 1980. Her Conservative government had been elected on a rather fine platform loaded with free-market rhetoric, and in the next 12 years she did, in fact, achieve more to restore liberty in the UK than any Prime Minister in 150 years.

But her record on taxes was terrible. Yes, she reduced the income tax rates (while NOT eliminating it altogether) but she doubled the rates of VAT. Brits are now paying just as much tax, in total, as ever. When (not "if") the Feds here zap the Income Tax, they may not even pretend that we'll pay less - they'll call the change "revenue neutral" and make sure the VAT rate is set high enough to rip off just as much of our money as the Income Tax does now. Hence the need for extreme vigilance and fast thinking, as shown below.  

How It Works

The Value Added Tax is rather like a sales tax, but with one important difference, to which I'll come in a moment. Rates (in Europe) are set at 15% to 25%, two or three times what residents of some US States pay in sales tax. The actual payment is made at the point of sale, as with sales tax; you buy an item for $100, what you actually hand over is (at 20%) $120, to the retailer.

If it were a Sales Tax, the retailer would then hand the $20 to the government. But with a VAT, the government gets the $20 a different way; small parts of it are handed over before that final sale, from each company involved in the chain of manufacture and distribution of the item we buy.

So the raw-material miner might pay $2, as 20% of the "value" that he added to the stuff he dug out of the ground and sold to the miller. Then the miller might pay another $4 on the value he added by shaping the raw material.

Then the "manufacturer" assembling the finished product may add another $50 to the value (and so, he pays the government another $10) and finally the retailer marks it up another $20 for his profit, and sends Uncle "his" final $4.

The customer - you and I - pay the retailer $120 and we are the only actual ones to suffer the $20 tax because all the other participants reclaim all they "spend" on VAT, from the trader to whom they sell the part-finished product. All the traders pay nothing at all, net. They collect, but do not pay.

Now, why make that so clumsy and complex? - why have four traders running a VAT account with the government, instead of just one - the retailer - as with a sales tax? I've only recently come to understand the answer to that.  

Hard to Avoid

It's to make it much harder to avoid.

Suppose (as certainly should be the case!) that this new tax on things we buy is very unpopular. So much so that, let's suppose, one trader in ten is willing to risk prosecution by not collecting tax for the government and to operate instead in a "black" market. He'd be doing his customers a favor of course, by selling for less than his rivals; everyone would win except Uncle.

If the tax were a sales tax, that could very well happen (at rates like 20%!) and the result could be that the government gets very little of our money; the whole market becomes "black" (actually, white; "black" is what government people call it, in the hope of making it sound immoral.)

But if it's a value-added tax, then to prevent the government getting its fangs on our money, ALL FOUR traders in the example above would have to conspire to keep Uncle's fingers out of the till. And that's MUCH more difficult.

How much more? - well, suppose as above that one trader in ten would take the risk. So the probability of one doing so is 0.1. That means the probability of all four in the sequence doing so is 0.1 raised to the fourth power; and that is not one in ten or even one in forty, but one in ten thousand!!

By the simple and cunning method of making all four participate as tax collectors instead of just the one at the point of retail sale, the taxman raises his probability of actually getting our money by a factor of 1,000. Let nobody say that government people are stupid. The VAT is very, very vicious!  

Countermeasures Needed

Recently in this column I predicted that the present Income Tax would be history within 5 years, and right on cue on June 18th, Congress voted to end it in 2002, just 4 years from now. They must all have been reading what I wrote. Just shows you how influential this column has become.

That doesn't say it will really end then; it merely says the Republicans are hoping for some votes next November for saying that it will. No replacement has been specified; as things stand today, Congress has just cut off its own legs. So we can be rather sure they will, sometime soon, announce a replacement.

When all the pretended "debates" have taken place (and most likely, after the next elections!) what I think they will choose will be a VAT - for the reasons just explained. It may be very, very hard to avoid paying it.

What need we do, to keep this expected vacuum hose out of our pocketbooks? - I know of no well-developed answer, but think it will involve shopping largely on the Internet. Transaction messages on the Net can be so well encrypted that government snoops would take a thousand years to unscramble who's buying what.

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