Value Added Tax is quite literally a tax on "value added". Why do people not think about what "value added" means?

The Tory wannabes are trotting out their tax plans, and a couple have mentioned looking at VAT (Michael Gove, article by Sam Dumitriu, and Rory Stewart, via @Sam_Dumitriu).

(Wow, Rory Stewart has “land value tax, at least for business and agricultural land” in his ‘good’ column and “business rates and no land value tax” in his ‘current taxes’ column. That’s his leadership chances flushed down the toilet).

Gove and Stewart are politicians and don’t know or care about economics. Dimutriu ought to know better and is the bigger idiot for it. He goes along with the Big Fat Lie that VAT is some sort of harmless tax on ‘consumption’ or ‘indirect tax’ which does not affect production.

Let’s take a step back and agree that income tax/NIC are taxes on wages or earnings and corporation tax is a tax on corporate profits. Their effect is pretty much the same, the percentage rates and administration is just different.

I trust we can also agree that workers and businesses ‘add value’, and the more value they add, the more tax they pay. So income tax, NIC and corporation tax are literally taxes on added value.Value Added Tax is just more of the same. We reach an equilibrium point between gross selling prices, net wages after tax and net profits after tax, that point is fixed by the overall tax wedge. Shuffling between these four taxes makes no difference to anything.

It would make no difference to gross selling prices, output, net wages or net profits (of VAT registered businesses) if we:

a) went to one extreme and scrapped VAT and increased taxes on wages and profits; or

b) went to the other extreme and scrapped income tax, NIC and corporation tax and increased VAT to a very high rate.

Here’s a worked example for a typical sort of VAT registered company, which sells output for £120 gross; pays £36 to VAT registered suppliers, pays gross wages (incl. employer’s NIC) of £50; employees receive net wages of £30; and has profits before corporation tax of £20.

Current system, with VAT

Gross sales…………………..£120
Paid to HMRC as VAT…..(£14)
Net sales………………………£106
Paid to suppliers, net……..(£30)
VAT paid to suppliers
and passed on to HMRC….(£6)
Gross wages………………….(£50)
Net profit before tax………..£20
Corporation tax @ 19%……(£4)
Profit after tax…………………£16

No VAT, 17% extra Employer’s NIC and 38% corporation tax

Gross sales……………………£120
Paid to suppliers……………(£36)
Gross wages………………….(£50)
Extra Employer’s NIC
£50 @ 17%……………………(£8).
Net profit before tax……….£26
Corporation tax @ 38%…..(£10)
Profit after tax………………….£16

No income tax, NIC or corporation tax, VAT at 46%

For the non-mathematically minded, net sales £82 x 46% = £38; £82 + £38 = £120, so gross sales £120 as before.

Gross sales……………………£120
Paid to HMRC as VAT…..(£38)
Net sales………………………£82
Paid to suppliers……………(£36)
Tax-free wages……………..(£30)
Tax-free profit………………..£16
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The idiots out there think that because sellers can split the total selling price up into ‘net’ and ‘VAT’ that magically, consumers pay it.

If that were true, businesses could simply split the selling price into ‘net’, ‘corporation tax’ and ‘VAT’. Would the idiots then believe that businesses don’t pay corporation tax?