Here I will, over time, gather various discussions of taxes.
For simplicity, I will use “IRS” when referring to the respective “taxman agenc[y/ies]”. Note, however, that different countries differ not just in naming but also in the structuring, working, responsibilities, whatnot, of their respective “IRS”—including that some countries, e.g. Germany, might have multiple instances with similar responsibilities. Likewise, I will speak of “government” without regard for what portion of government, what level of government, whatnot, is involved. (For instance, I do not differ between federal, state, municipal, whatnot entities, unless it is contextually important. Ditto taxes levied, etc.)
Apart from the apposite saying about death and taxes, I point to George Harrison’s “Taxman” for a good illustration of taxes, the mentality behind taxes, the mentality of the IRS, etc. To quote some portions (with reservations for transcription errors):
Let me tell you how it will be: There’s one for you, nineteen for me.
[...]
Should five percent appear too small, be thankful I don’t take it all.
[...]
If you drive a car, I’ll tax the street.
If you try to sit, I’ll tax your seat.
[...]
If you take a walk, I’ll tax your feet.
[...]
The “one for you, nineteen for me” was approximately true at the time of Harrison’s writing, if we look at the top marginal rate of income tax in many countries. Such extremes are, fortunately, rarer today than back then, but the overall tax pressure can still be crippling, especially when we look at marginal earnings. For instance, if a high earner works one hour more, chances are that the government earns more or far more than he (or his employer) does.
Here it is important to not just look at the income tax (an all too common error). For instance, Germany, where I live, has a default VAT rate of 19 percent, while my native Sweden is at 25 percent. The implication is that I need 119 Euro to buy an object with a “true” price of 100 Euro in Germany, which reduces the value of my money earned through an indirect tax. Here we also see how important it is to consider the “life-cycle” of money earned, not just the moment of “birth”. To make matters worse, few consumers are truly aware of this, as they only see the final price, VAT included, charged at the point of sale. (In contrast, U.S. sales tax is often added in a more transparent manner, so that the consumer sees that the “true” price is X and that the government now charges some percentage on top of that price.)
It is also common to, as in Germany, hide taxes under names like “insurance” (“Versicherung”), while the details show that the alleged insurance is either “a tax by any other name” or, failing that, has more in common with a tax than an insurance. Consider e.g. an “insurance” for health that charges a flat percentage of income, regardless of individual risk, where the coverage is over-extensive and non-individualized, and the system has a strong element of transfer payments between groups with different earnings. (As opposed to the implicit transfer of a proper insurance, between those who were lucky and those who were unlucky, after having voluntarily “pooled their risks”.) Here we have a tax-based form of socialized medicine hiding under the name of “insurance”.
Germany is also an example of a country that hides half of some taxes through a split into a nominal “employee share” and a nominal “employer share”, where the total might land in excess of 30 percent of the nominal earnings, but the employee only pays half nominally. The other half is nominally paid by the employer, but, in reality, hurts the employee through holding back his overall earnings by a similar amount—he does pay approximately the full amount himself, but the cost is disingenuously hidden by the nominal division. (And those “in excess of 30 percent” do not yet include income tax.)
More generally, taxes and whatnots levied on businesses eventually hit the man on the street through issues like higher prices, less growth, less employment. To see e.g. a corporate tax as something that just hits businesses (let alone “the evil exploiters of the working class”) is extraordinarily naive.
A particularly perfidious form of quasi-tax is inflation, hitting both earnings and existing wealth. (And often with other side-effects, e.g. that someone drifts into a higher tax bracket based on an increased nominal salary, while his real salary, after adjusting for price inflation and/or purchasing power remains the same.)
A longer discussion of inflation, including the difference between “inflation” in the strict sense and “price inflation”, as well as causes and consequences, will follow elsewhere. For now, with some over-simplification, it suffices to say that the government can create more money for it self at the cost of making the money of others less valuable, which has effects that are very similar to those of taxes. (With taxes, money at a fix value is taken from the tax payer to give to the government. With inflation, the government reduces the real money holdings and earnings of others, without affecting the respective nominal value, in order to have more money for it self.)
Value Added Tax is a particularly obnoxious, often perfidious, form of tax, beginning (from a personal perspective) with the disproportionate “administrative” efforts that it causes (at least, the German) entrepreneur.
Below, I will discuss some of these issues—and I encourage the reader to keep in mind how these problems would disappear in a world without VAT.
In addition, obviously, VAT makes products more expensive, implying less money for the buyers of the products and more for the government, but some variation of such a money transfer is inherent in all taxes.
As noted above, VAT is a “hidden” tax. My personal suspicion is, indeed, that this is the true reason for VAT—it is a way for the government to keep the tax pressure up without the broad masses understanding how high the tax pressure actually is.
In the big picture, this is far from the most important problem with VAT and it does to some degree depend on the implementation. However, it has been a major personal annoyance and I take the liberty to begin here.
More than half of the efforts for my IRS filings stems from VAT—not my own and actual incomes and expenses. (Note that experiences in other countries might be different.)
Three particular issues:
Depending on level of earnings, a monthly or quarterly preliminary filing must be made in addition to the yearly filing. (Forcing the use of the inexcusably user-hostile “Elster” tool. See a dozen-or-so older texts.)
Every receipt, bill, whatnot, must now be considered from two different perspectives, namely those of “how much have I spent/received” and “how much was the VAT”. These numbers must be separated and tracked in a reasonable manner, while taking complications per the next item into account.
The connection between pre-VAT charge and post-VAT charge is not trivial.
Notably, there are at least two different VAT rates (19 percent as default, 7 percent for some rebated products; some rare special cases have different rules entirely, e.g. insurance and postage) and both can occur on the same receipt. It is then not possible to say that “I spent 100 Euro pre-VAT; ergo, I had an additional VAT of 19 Euro” or “I spent 119 Euro post-VAT; ergo, I had a pre-VAT price of 100 Euro”. Instead, both the VAT and the pre-VAT price must be individually tracked.
To make matters worse, different sources have different approaches to reporting VAT. A proper bill typically clearly states the pre-VAT price as the “real price” and puts VAT on top of that (good for business customers that pay VAT; bad for private customers, who can be tricked into underestimating the total cost). A receipt from a regular store, on the other hand, typically gives the post-VAT price and mentions other numbers parenthetically (bad for the business customer; good for the private customer; very good for the government, because the VAT is hidden from the customer). Some, notably train tickets, might be inadequately specified, forcing the VAT payer to engage in guess work (especially, as the VAT rules for public transport are not uniform).
Here we also see a difference in approach to calculation: An “invoice” approach might begin with a round number, say, 100 Euro, for the pre-VAT price, leading to a post-VAT price of 119 Euro, while a “receipt” approach might end with a round number, say, 120 Euro, leading to a pre-VAT price of 120/1.19 Euro. In a next step, issues of rounding and which price is the canonical basis arise.
One of my first jobs involved working on an auction platform for C-to-C and B-to-C transactions, where we built our database to use the end/post-VAT price as the canonical price, calculating VAT and the pre-VAT price based on the VAT rate when needed. In parallel, another project was started to handle B-to-B auctions for another customer. Our code was used as a first basis, and a colleague was very annoyed that he could not use our solution without changes, because he needed the pre-VAT price to be canonical. This was the more of an issue, as we wanted certain core functionalities, including e.g. billing, to be common for both projects.
(While I do not remember how we resolved this, my recommendation would be to keep all fields and values involved explicit based on a one-off canonical calculation, including pre- and post-VAT price, actual VAT price, and VAT rate, with no later calculations. The price in data redundancy is acceptable.)
During the COVID-countermeasure era, to make matters more complicated yet, the regular VAT rates were temporarily lowered by some slight amount, which caused considerable additional confusion, extra work, and whatnot—possibly, to the point that the temporary lowering did more harm than good for the overall economy. For my part, fortunately, I was on a coincidental sabbatical during this period, and was not affected in terms of tax filings.
A particular absurdity is that VAT is not counted as a mere cash-flow issue, not just a stream of money that the entrepreneur briefly administrates on behalf of the government. Instead, contrary to the underlying matters, it is seen as income or as expense, depending on direction. Instead of having an income of X as per net billing (assuming that the bill is paid), a fictitious income of 1.19X is now postulated, which goes hand in hand with an additional expense of 0.19X payable to the IRS. This is not just absurd in principle but also increases the paperwork.
Of course, similar issues are not limited to tax filings. Note e.g. the complications caused with the auction software above, how cash registers must be able to handle VAT, how bills must contain two different sums (pre-/post-VAT) and a separate post for VAT, etc.—not to mention the extra efforts that e.g. the IRS, it self, has in handling these matters.
From the detail regulations in force, and contrary to name and portrayal, VAT often amounts to a tax on the citizens—not on the product (resp. the value added).
Consider tax-free schemes, where a product bought by a tourist can be freed from VAT in the country of purchase, even though the value added remains the same as if a local had bought it—and, worse, the same tourist might be forced to pay VAT to his own government when he returns home, for a product that was sold and (likely) produced entirely abroad.
The same applies to commercially imported goods: Import some finished good from country A to country B and sell it in country B and the VAT of country B applies, never mind that the value creation took place abroad.
Import regulations (both in general and with regard to VAT) can be quite complicated and vary greatly from country to country, even with the combination of country of export and country of import.
The exact details of what happens, I leave correspondingly unstated; but that VAT applies when the product is bought by a consumer, regardless of whether it is an import or a local product, seems to be a fixture. (In those countries that have VAT, in the first place.)
A particular negative is that this reduces the ability of different countries to compete through e.g. lower VAT rates, which is a further hindrance of market forces and something that hurts everyone in the long term. Other mechanisms can have a similar effect, as with the EU-wide minimum default VAT of 15 percent, which presumably serves to reduce competition and make it easier for governments to exploit the tax payers. (While a sane system might have imposed a maximum limit, in order to protect the tax payers from governmental excesses—and even 15 percent is an excess by any reasonable standard. Also note the Biden-driven attempts at a global minimum corporate tax of 15 percent, which serves similar purposes and does similar damage.)
A related side-effect is that VAT can, to some degree, serve as an import barrier, similar to a trade tariff. Unlike a trade tariff, it does not favor local sellers and producers selling locally over foreign sellers and producers selling locally, but it can favor exporters over importers, which has a similar effect. The U.S., notably, has complained about this relative some other countries, including members of the EU. A Chrysler sold in Sweden would come with 25 percent VAT; a Volvo sold in the U.S. would not. (Be they imported or locally produced. Whether the net damage to the local producers through harm to the, often more important, local market is smaller than the net gain through an export advantage relative foreign competition is another question—but trade tariffs usually do more harm than good, too.)
VAT disturbs the natural market equilibrium between supply and demand, which leads to lessened sales, lessened production, lessened growth, etc. (In detail, many other complications can occur, e.g. that fewer units sold reduces economies of scale. I will ignore such complications below.) If a product priced at 100 Euro (from the point of view of the average consumer) would sell X units, the same product priced at 119 Euro would likely sell considerably fewer units, leaving both consumer and seller worse off. Moreover, an additional distortion is likely, as the new optimum price is likely to be lower. We might then have a pre-VAT price lowered from 100 Euro to (hypothetically) 95 Euro, cutting profit margins by 5 Euro per unit while keeping the number of units sold a bit higher than if the pre-VAT price would have remained at 100 Euro.
Above, some vagueness is necessary, because different products “react” differently to price changes, changes in units sold, etc. (Also note the idea of “price elasticity”.)
Moreover, when different products have different VAT rates, a shift from one product to another can take place in a manner that reduces the effectiveness of market forces. Ditto, when products with different price elasticities have the same VAT rate.
If we take the “value added” part at face value, VAT is an utter absurdity, as it effectually punishes someone for adding value to the world, e.g. by taking a piece of iron ore and making steel or a piece of steel and making a nail.
In reality, of course, it is less a matter of value and more of price, with an indirect connection in that a more valuable product is likely to sell at a higher price, just like a certain quantity of steel in shape of nails is likely to sell for more than the same quantity in the shape of iron ore. (A text on price vs. value, different values to different persons, etc., is in my backlog.) The increase in price, however, might well reflect something different, as when a hardware store buys the nails at one price from a bulk seller and resells them to consumers at a higher price. (The consumers have the benefit of easier access, while the store has costs and the need to make a profit; the value of the nails, per se, remains identical.) We might even have the same store chain selling the same product at different prices in different locations.
If we take a price-perspective, however, it would be both better (smaller market disturbances) and more reasonable (tax on profit, not prices) to scrap VAT and instead adjust the corporate tax rate.
Some Leftists might argue that VAT would be a punishment of price gouging businesses, that they are taxed according to their prices, but as the ultimate main victim is the consumer, who must now pay both price and VAT, this falls flat on its face. (Even discounting that accusations of price gouging are usually empty rhetoric and that price increases are often driven by government-created problems.)
Worse, someone who increases prices based on e.g. “brand power” is punished less than someone who raises prices due to increased costs.
Even with a price-perspective, enough of the underlying “value added” principle remains as to make VAT absurd. This, especially, as the costs of adding value are not adequately considered (yet another reason to scrap VAT in favour of corporate tax)—while a price might be hiked at will (if at the risk of a loss of sales), adding actual value can be costly.
A particular distortion is how various items can be more expensive for consumers (including those pursuing business activities without being “VAT eligible”) than for (“VAT eligible”) businesses. For instance, if I buy a computer as a private person, I must pay VAT, while I am free of this burden if I buy it for my business. (More specifically, I must still pay, but I get a refund from the IRS at a later date. I ignore such complications in the continuation.) In a country with limited opportunities for non-incorporated businesses, we have additional issues, like that a writer who buys a computer for the purpose of professional writing might still need to pay VAT, while (in an alternate reality) the very same computer bought, even for identical purposes and for his use, by his employer is VAT free.
In a next step, we have issues like cheating, future changes, and sloppiness: What is to prevent someone from buying a computer, claim it as “for business” and then use it exclusively privately? Or what happens if a computer is bought for business use today and moved to private use after some few years? (Note that this might be perfectly in order, depending on local law, e.g. if the computer has been in use long enough to be written off.) For lesser items, e.g. pen and paper, it might require disproportionate effort to even keep track of what was originally bought for business and what for private purchases. The effect in all cases, be they legal or illegal, deliberate or accidental, is that an item for private use has been freed of VAT in a manner that is not open to most others.
In my impressions so far, and as with the “Taxman”, the IRS (and/or many of its employees) has a fundamentally flawed attitude—that it would be its job to extract as much money (not necessarily in the form of taxes, cf. below) as possible from the people.
The taxes and tax levels, however, are (in democracies) determined predominantly (ideally, entirely) by the legislative branch or its local equivalent. The job of the IRS is to implement whatever the legislative branch decides, and to do so in a fair and equitable manner. To go beyond this, e.g. by making own interpretations that favor the government and/or the IRS over the tax payers for the purpose of favoring the government/IRS is inexcusable. A good example is how the German IRS, year in and year out, charges “late interest” far above the inflation rate and the market interest rate, even when the tax payer is not to blame for the delay. Year in and year out, citizens go to court; year in and year out, the rate is struck down as disproportionate by the courts for the year at hand. Nevertheless, the IRS stubbornly sticks to these disproportionate rates.
I have myself been a victim running my business. One of my tax filings was processed so slowly by the IRS that some deadline that triggered such interest was exceeded. That the problem was a delay caused by the IRS was of no matter; the rates, again, well above what was proportionate. Likewise, it did not matter that I had without exception paid the preliminary tax installments prescribed by the IRS based on my income from the previous year—because I earned more in the year at hand, I had an involuntary under-payment upon which the interest rate applied.
The system is, plainly and simply, sick.
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