Kellis91789 remarks on an aspect of VATs ...
[quote]
GRTs is that a GRT cascades and accumulates with multiple stages of production if those are separate entities.’
If I understand correctly, I had brought up that concern earlier and received this response [which I posted earlier] ...
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[Babwa wrote how Cruz avoids ‘double counting’ — very clear description here.]
A problem with counting all business revenues is that it ends up being a double-counting. For example, suppose you love watching Disney movies on Netflix. Netflix gets revenues from your subscription, and then it uses some of that money to pay Disney for the rights to Disney content.
If we counted that money both at the Disney level and the Netflix level, we’d end up taxing the same basic product twice, merely because it involves two different companies. This is not good tax policy; that’s why modern tax systems try to avoid this.
The way the subtraction-method VAT fixes this is by, well, subtraction. Under this kind of tax system, Netflix would count all of its revenue, but then subtract the amount that it pays to other businesses, like Disney. Disney would then have to account for its own revenue and also file taxes. The result is that everything gets neatly single-counted, and nothing gets double-counted.
There’s also one other thing the tax subtracts: capital costs. That is, when Ford builds a new auto plant, it can deduct those business costs as well. This is an important aspect of the tax, and it marks a slight difference with corporate income taxes today (which also allow these costs to be deducted, but over a much more complicated schedule.)
http://taxfoundation.org/blog/ted-cruz-s-business-flat-tax-primer
— Babwa
The idea that it is “double counting” is incorrect — in that a PORTION of the amount is taxed at each stage rather than simply “twice” as “double” implies. So a tax may be applied to portions of a product a dozen times if that is how many stages of production and distribution it goes through before it is purchased at retail. That makes it sound worse, right ?
But consider that payroll and profit taxes are currently being paid at each stage of production and distribution for that product. There is no “credit” given to a manufacturer for the payroll taxes and profit taxes paid by the supplier of the components.
[ This is not good tax policy; that’s why modern tax systems try to avoid this. ]
This statement is simply untrue unless you want to count Corporate and Individual Income Taxes and Payroll Taxes as not being “modern”. There is nothing inherently wonderful about only taxing an item once, unless your goal is to have a huge tax rate be visible in a “starve the beast” strategy like the FairTax does.
I would note that the high VAT rates in Europe of 19%+ (which is all the consumer sees) do not seem to have achieved a reduction in government spending there. There has been no “starve the beast” strategic success there. Instead, it provides a huge incentive for the consumer to evade the VAT. I know people in Europe who buy Home Theater gear in other countries and have it shipped to them labeled “Birthday Gift” and their home country gets zero revenue from that purchase. If there had been a 5% GRT rather than a 19% VAT, the incentive to evade would not be enough to bother with such foreign purchases, shipping and risk.
BTW, did you notice the deduction/subtraction of capital costs ? That is the government making decisions about what is “good” business practice. Politicians and bureaucrats have no expertise at business. There is an assumption that capital investment is good when it may or may not be the most efficient way for a particular business to succeed. Why should a business that buys a bunch of equipment to increase production get a tax break that another company who spent that same amount on more/better labor did not get ? Let businesses invest in capital, r&d, employee benefits packages, etc. because it is the best decision for THEIR business and not because it carries a tax benefit.