The Folly of Loopholes and Complex Tax Codes

[Khendraja'aro]

If you had read my first post on this topic, coupled with the comment "the VAT system is overly complex", then I dare say that you'd be able to make the connection on your own.

[agamemnus]

wiggin, I agree that changing a system frequently is bureaucratic - the same as any tax. No reason that needs to be done.
No ag, you misunderstand the situation. The reality is the opposite, VAT is a flat charge on all Goods and Services. The zero-rated items are the exceptions not the rule.

Think of it with regards to food, dear Rand, with regards to food only. Even if, as you say, there was a tax on all food first, and then an exception passed for unprepared food, my analysis is the same.

-------------

To add, I don't think a tax on prepared or even restaurant food is economically sensible:

1) Taxes distort the market.
2) Eating out is an enormous market.
3) Therefore, eating out is more expensive for everyone involved. (fewer people eat out, the price is higher, and all restaurants and... subways... and... bagel shops... are penalized)
4) Therefore, people spend more time making food instead of eating out or ordering food, wasting the time they could have spent on relaxation or maybe even getting more work done, thus lowering productivity.

And then, of course, there is the issue as was noted of actual accounting and enforcement, which costs even more money.

Economically? A disaster.

[RandBlade]

Think of it with regards to food, dear Rand, with regards to food only. Even if, as you say, there was a tax on all food first, and then an exception passed for unprepared food, my analysis is the same.

Why?

There is a tax on everything not food. You may want to play mind games, but that's not the reality.

To add, I don't think a tax on prepared or even restaurant food is economically sensible:

1) Taxes distort the market.
2) Eating out is an enormous market.
3) Therefore, eating out is more expensive for everyone involved. (fewer people eat out, the price is higher, and all restaurants and... subways... and... bagel shops... are penalized)
4) Therefore, people spend more time making food instead of eating out or ordering food, wasting the time they could have spent on relaxation or maybe even getting more work done, thus lowering productivity.

And then, of course, there is the issue as was noted of actual accounting and enforcement, which costs even more money.

Economically? A disaster.

Interesting logic that people eating food at home is bad for economies. The point is that everything gets taxed, but some necessities are either not taxed (zero rate) or have a reduced tax (5%). The point is politically to not tax essentials but to place the full tax burden on luxuries. VAT in general as a tax on consumption is a "regressive" tax since the poor spend a higher proportion of their income (close to 100%), because of the zero-rate on essentials arguably it is not regressive any more or even progressive since the proportion of income spent on luxuries rises as income rises.

If all you were to buy is "essentials" then you don't pay the tax.

[Veldan Rath]

But, as you seem to already suggest by the " " around essentials, is that essentials become political maneuvering points.

However, I'm not against a consumption tax (VAT or Sales), it should just be the same rate across the board, the government needs revenue, it does not need to play favorites.

Another point, what we are worried about on this side of the pond is that the fed is going to add a VAT over here, while we will still have State(s) Sales tax.

Wahoo.

[agamemnus]

Exactly, Veldan... eating out may be considered by some to be a luxury, but it is not a luxury as many people consider it to be: some form of consumption that is both conspicuous and wasteful/inefficient... like a private jet, or 3 unused swimming pools. The kind of "inefficient" dining of waitresses in professional tuxedoes, a soft-playing classical music, and people talking in hushed tones died out many years ago.

How is buying pre-cooked chicken at a supermarket, instead of waiting an hour to cook it, in any way a luxury? It's a time saver. Are computers luxuries too, now? Maybe paper is a luxury, or a car? Let's just walk! That's not taxed...

[Aimless]

So now I'm told that in the EU you can have regular VAT, and then two separate VAT levels below that. In Sweden, it's 25, 12 and 6%. Hotels are at 6



PS. Raise taxes on your damn' "restaurant"-food Aggie and maybe people will be healthier, which can only be good for your economy. You should see the whole picture.



Khen, how are they proposing to reduce the complexity? Like, reduce the number of things that are at the two levels below the regular rate?

[Hazir]

Well, could you then enlighten us what they want to change?

What they want to change is exactly what I pointed out; they think German politicians are too generous with the lower tax brackets and think that should end because it isn't 'logical'. There is nothing in their ideas that would constitute an overhaul of the system in which the exemptions are granted.

By the way, the German contributor has forgotten that acting like an aggressive twat is not really what is expected from people who post in this sub-forum?

[RandBlade]

Exactly, Veldan... eating out may be considered by some to be a luxury, but it is not a luxury as many people consider it to be: some form of consumption that is both conspicuous and wasteful/inefficient... like a private jet, or 3 unused swimming pools. The kind of "inefficient" dining of waitresses in professional tuxedoes, a soft-playing classical music, and people talking in hushed tones died out many years ago.

How is buying pre-cooked chicken at a supermarket, instead of waiting an hour to cook it, in any way a luxury? It's a time saver. Are computers luxuries too, now? Maybe paper is a luxury, or a car? Let's just walk! That's not taxed...

Yes cars and computers are taxed. The whole point that you're missing is that everything is taxed, apart from a few items. The exceptions are those items not taxed, not the other way around

[agamemnus]

Ok, everything is taxed. Ok, ok, ok, ok, CALM DOWN! However, the reason "basic, unprepared" food isn't taxed (in many places, including Massachusetts) is what? Why isn't it taxed? My point was that it is not taxed because it's a political game with no economic rationale (ie: a rationale based on the economy as a whole, not the aspirations of politicians).

[RandBlade]

The rationale is that necessities are cheaper for people so they can afford them easier.

[Flixy]

If you had read my first post on this topic, coupled with the comment "the VAT system is overly complex", then I dare say that you'd be able to make the connection on your own.

So the problem isn't the VAT system, but the web of exemptions that doesn't make sense anymore...

B
However, I'm not against a consumption tax (VAT or Sales), it should just be the same rate across the board, the government needs revenue, it does not need to play favorites.

Well, you see, our government likes to play favorites by allowing people to be able to buy food and all that. Though I agree that the difference between different types of food is a bit vague, which is probably why all food and drinks are in the low tax bracket here, that makes it easy. The only exception is alcohol, since the government thinks that's bad for us.

[LittleFuzzy]

PS. Raise taxes on your damn' "restaurant"-food Aggie and maybe people will be healthier, which can only be good for your economy. You should see the whole picture.

When I eat out is the only time I really spend time looking for low fat or extra-healthy options on the menu.

[Loki]

There's a tax on fast food anyway. If you bought the equivalent food in a supermarket, a vast majority of it wouldn't be taxed.

[Dreadnaught]

Err, all food is subject to the lower rate. And if you are talking about the actual animals, they fall under cattle. Don't know why the financial services are exempt, probably to make it attractive for banks to operate? Or possibly to keep costs down for all industries, I only encountered that one with transaction fees myself. And I don't see why you'd need a computer to 'price' things It's not hard to set a price, you know. And any business keeps his books anyway, simply deduct the appropriate amounts of tax from sales, and do the same for what you bought.

The entire tax form consists mainly of three things you have to fill in: how much you sold in the 19% catagory, how much you sold in the 6% catagory, and how much VAT you have paid yourself to suppliers. That's all.

My bad on the cattle thing, I should stop posting after my bed time.

Though that's still a very broad area of potential exceptions. And my point about the financial services exception is exactly because it makes it attractive for those businesses to operate. A VAT exception is attractive for any business, so they will always want to get an exception. This is what leads to crony capitalism in certain countries.

The reason pricing and accounting becomes more complicated is because you need to relay a portion of your revenues to the government based on precise volumes sold at different rates. Imagine some of the exceptions and different rates Khend has described in the German VAT system. Now imagine one store selling 100 types of goods with a range of 10 different VAT rates. Accounting for the portion of revenues that must be passed-along to the government can get complicated.

Obviously it's doable. But my point is, as before: Assuming two business environments that have the same regulations, but one uses a VAT and one has a flat business income tax, the flag business income tax seems a lot more straight forward and involves less work. I don't see what the advantage is to VAT.

[wiggin]

Dread, classical advantages to VAT are that since taxes are collected at each step of the process (and enforced by the companies themselves, so that they don't get stuck holding the bill) you'll have less evasion. Furthermore, it has the normal pluses of a tax on consumption as opposed to income or wealth or any other tax. I'm personally not opposed to a VAT in principle, I just think that its implementation in most cases is pretty awful.

That being said, the implementation of other taxes is also pretty terrible. Corporate income tax in the US is a web of deductions and exemptions with lots of loopholes - ways to carry forward or backward losses to reduce a tax burden in a good year, complex ways of calculating allowable expenditures (e.g. travel, lodging, food, etc.), definitions for what counts as investment/R&D (and thus has special tax provisions), etc.

The big issue here is that governments try to encourage certain behaviors by taxing them less. Unfortunately, the result most of the time is that the rules get too complex too quickly, and any potential gains in productivity/etc. are lost in people using the loopholes for evasion, or being too confused about how to best run their businesses or finances. At the end of the day, very streamlined tax systems are almost always the way to go. I wouldn't completely eliminate some of the more important exceptions/deductions, but most should go.

And like I said, for any small business (not sure how it works for big companies), the tax return is one page. Of course you do need to keep your receipts, and in bigger companies you'd presumably have your bookkeeping checked by an accountant - but you have to that already anyway.

I suspect it gets more complicated for larger businesses, but my real gripe for small businesses is on the accounting end. *shrugs* I have no doubt that in theory a VAT could have a minimum of paperwork, and probably some countries do better than others.

[agamemnus]

The rationale is that necessities are cheaper for people so they can afford them easier.

That's a fallacious economic (?) rationale. One person's hour of work at his or her job may be much higher in money value than the price of prepared food -- either to him/her, to the company, to the economy, or all of these. In fact, I would wager this is a common occurrence. With lower taxes on prepared food it would be even more common.

PS. Raise taxes on your damn' "restaurant"-food Aggie and maybe people will be healthier, which can only be good for your economy. You should see the whole picture.

That's certainly potentially a consideration, but again a fallacious argument. How would you measure the health benefits of restaurant food versus home-made food? Either one is liable to be healthy or unhealthy depending on a large variety of factors. With today's informed consumers, available information, and developed prepared food industry, people have a big say in both how their food is prepared ("hold the dressing!") and where and what they can buy. ("low-fat pl0x!")

[RandBlade]

That's a fallacious economic (?) rationale. One person's hour of work at his or her job may be much higher in money value than the price of prepared food -- either to him/her, to the company, to the economy, or all of these. In fact, I would wager this is a common occurrence. With lower taxes on prepared food it would be even more common.

1: Name anyone who works 24/7
2: Cold prepared food to be cooked at home (eg microwave meals) are also VAT-free. Hence why Sub's are VAT-free.
3: I can feed myself and Amanda for about £2.50 at home. If I go out the minimum I'd spend is a tenner (eg McDonald's) or if at a restaurant £25 would be the least I'd expect to spend.

Even without the fact that even I don't work 24/7, after tax, NI, rent, utilities, TV and other fairly fixed cost expenses are taken out of my monthly wages, my disposable income is not an earning of £22.50 per hour. I suspect the same for most people.

[Dreadnaught]

Dread, classical advantages to VAT are that since taxes are collected at each step of the process (and enforced by the companies themselves, so that they don't get stuck holding the bill) you'll have less evasion. Furthermore, it has the normal pluses of a tax on consumption as opposed to income or wealth or any other tax. I'm personally not opposed to a VAT in principle, I just think that its implementation in most cases is pretty awful.

That being said, the implementation of other taxes is also pretty terrible. Corporate income tax in the US is a web of deductions and exemptions with lots of loopholes - ways to carry forward or backward losses to reduce a tax burden in a good year, complex ways of calculating allowable expenditures (e.g. travel, lodging, food, etc.), definitions for what counts as investment/R&D (and thus has special tax provisions), etc.

The big issue here is that governments try to encourage certain behaviors by taxing them less. Unfortunately, the result most of the time is that the rules get too complex too quickly, and any potential gains in productivity/etc. are lost in people using the loopholes for evasion, or being too confused about how to best run their businesses or finances. At the end of the day, very streamlined tax systems are almost always the way to go. I wouldn't completely eliminate some of the more important exceptions/deductions, but most should go.

I'm not sure I follow how companies enforcing the tax themselves is part of the fundamental pitch for VAT.

[RandBlade]

If I buy a good from someone else then I insist on getting a "VAT Receipt", which means I can reclaim the VAT I've paid on that purchase from my VAT bill. If they've provided me with a VAT Receipt then obviously they'll be unable to evade paying their bill as that would raise serious questions.

Since they're reporting it for VAT purposes they must also report the sale for other purposes including corporation tax. Were it not for my requirement of a receipt to reduce my own tax bill, the transaction could have been off the books, cash in hand and they'd be able to evade paying tax on the sale by not reporting it correctly.

[Dreadnaught]

Wait, so you can deduct VAT paid to purchase things you've sold?

[RandBlade]

Yes! That's what the VA stands for Value Added Tax.

If I buy £1000 of stock and sell it for £1500, I'll have paid £149 in VAT and would have taken £223 in VAT, so I would owe HMRC £74

Make sense?

[Dreadnaught]

Yes. When people call it a "tax on each level of product" I understood it as literally that, not that there was a daisy chain of deductions down the line. Which to me seems like an added paperwork burden.

[RandBlade]

It shouldn't be. You should process expenses properly anyway for the purposes of both good accounting and for corporation tax anyway. This just gives you significant motivation to have your books in order and not arrange illegal, off the book, "cash in hand" transactions.

[agamemnus]

1: Name anyone who works 24/7

Huh?

2: Cold prepared food to be cooked at home (eg microwave meals) are also VAT-free. Hence why Sub's are VAT-free.

Not everywhere... in general, food made on the spot (as opposed to a manufactury) has no taxes here, but food cooked or prepared in the supermarket isn't. (even if you have to microwave it again)

3: I can feed myself and Amanda for about £2.50 at home. If I go out the minimum I'd spend is a tenner (eg McDonald's) or if at a restaurant £25 would be the least I'd expect to spend.

That's not the case everywhere. $50 for restaurant food is ... probably something you'd find at an upper-end Boston restaurant as I described earlier. When I was in London some years ago, I did find that even a basic Italian restaurant cost a lot. Maybe that's because of the effect of your crushing VAT.


I'd up the price to $8-$12 for non-junk food made at home in the US, and food+drink+utensils bought from Applebee's is $11 or Cheesecake Factory (highest-end take-out there is) is max $20, unless you plan on eating like a complete pig.

That's a difference of $12, and most people have a wage higher than that; some much higher. This is why many people don't cook their own food in America, or even don't know how to cook (different issue slightly). Now, take out the tax rate and the difference becomes even smaller.

[RandBlade]

Huh?

You said people shouldn't cook because they could work instead. Funny, I don't know anyone who works 24/7 and even the busiest people generally if they're cooking do so on their time off.

Not everywhere... in general, food made on the spot (as opposed to a manufactury) has no taxes here, but food cooked or prepared in the supermarket isn't. (even if you have to microwave it again)

I'm talking about the UK's VAT system that you seem to object to.

That's not the case everywhere. $50 for restaurant food is ... probably something you'd find at an upper-end Boston restaurant as I described earlier. When I was in London some years ago, I did find that even a basic Italian restaurant cost a lot. Maybe that's because of the effect of your crushing VAT.

17.5% is crushing? Its 15% of the price only. Other factors include that we actually pay people wages here too.

I'd up the price to $8-$12 for non-junk food made at home in the US, and food+drink+utensils bought from Applebee's is $11 or Cheesecake Factory (highest-end take-out there is) is max $20, unless you plan on eating like a complete pig.

$8-12 are you talking per person, for 2 or more?

$12 seems like a lot to feed 2 people for just 1 meal.

Why would you buy utensils?

[GGT]

Yes! That's what the VA stands for Value Added Tax.

If I buy £1000 of stock and sell it for £1500, I'll have paid £149 in VAT and would have taken £223 in VAT, so I would owe HMRC £74

Make sense?

You'd pay 149 + 74 = 223.....on a 500 profit?

Forget the business end of things, I'd want to know how to figure VAT on things I buy. The food part is especially confusing me, as a consumer.

[agamemnus]

You said people shouldn't cook because they could work instead. Funny, I don't know anyone who works 24/7 and even the busiest people generally if they're cooking do so on their time off.

I don't understand the 24/7 argument. You don't cook 24/7... was not saying you had to work 24/7. I also said that you could do other things too--like relax.

I'm talking about the UK's VAT system that you seem to object to.

I object to taxes on prepared food. VAT is even worse, though relatively (against "regular" food) I guess the difference between VAT and regular taxes would be the same.

17.5% is crushing? Its 15% of the price only. Other factors include that we actually pay people wages here too.

It's a high price to pay. The wages are also a big difference. A lower wage for people who prepare the food versus people who eat it means a bigger economic gain for eating out.

$8-12 are you talking per person, for 2 or more? $12 seems like a lot to feed 2 people for just 1 meal.

Er, you serious, bro? I've been to your supermarkets and it's more expensive than here... maybe there's a stark difference in supermarket prices between London and 50 miles out, I dunno.
It's per person. Dinner -- chicken noodle soup and main course from a box; i.e. hamburger helper -- the meat, too -- that's a major expense. Vegetables. Maybe a fruit or some cookies after. It adds up. Food, drink... and don't forget to factor in the energy cost of the microwave, fridge, dishwasher/sink. And then there's the cost of the wax paper to reheat food and plastic to cover up any leftovers...

Of course, a small sandwich made from 2 pieces of bread, 1 piece of lettuce, some cheese and ham would be less expensive, but if you're going to compare eating out to eating dinner, let's keep the food proportionate...

Why would you buy utensils?

Plastic utensils are standard for take-out food, though you can refuse them. Not everyone takes out and eats at home... that adds some cost; even though it's technically free it's factored into the general price...

[littlelolligagged]

I can easily cook an enormous (and tasty meal) for 4 (or more) on under $10 for the entire thing. Meat, veggies, maybe a starch, dessert all included. Let me give you a hint - the words "from a box" mean you're not actually cooking or saving money.

[GGT]

Hey now, didn't we already go through this with the rice cooker thing?

EDIT I think aggie was just stating the obvious, for take-out expenses. They provide napkins, sporks or chopsticks, fortune cookies, maybe Wet Naps. I can see where he's going with that though.....how do you add a value-added tax for those kinds of things? If I buy Chinese food at my grocery store, or enchiladas or a pizza, and sit right there to eat the food, how do you TAX that as being different from the people who buy the same thing but take it home to eat?

[Flixy]

You'd pay 149 + 74 = 223.....on a 500 profit?

Forget the business end of things, I'd want to know how to figure VAT on things I buy. The food part is especially confusing me, as a consumer.

No, he'd pay 74 on a 500 profit.

223 is what the total tax burden on the 1500 is, of which 149 is paid by the supplier to rand, and he pays 74.

Is a sales tax like in the USA on each level? Or does only the end user pay?