VAT Flat Rate Scheme
"What's in a name," Shakespeare famously asked, "That which we call a rose by any other name would smell as sweet." This is true — the label given to something doesn't really change how it tastes or feels. But there are plenty of things out there that only exist because of their names. Take VAT flat rate scheme, for example. What most people know as 'value-added tax' originated with the words 'value added". That's right: it was originally called value-added tax because it taxes every part of production, not just where goods are sold.
But our lives are full of exceptions to rules like this one — not everything that shares its name has to have anything in common with its namesake. Our man here was so confused by this that he called it "vat-flat-rate scheme", which he then decided to hyphenate.
But how does this relate to VAT? Well, it's about the VAT rate. It turns out that we didn't actually invent VAT, or at least not in the way we think of it today. In its original embodiment, the principle of taxing where goods are produced wasn't really new — King Henry VII had introduced a tax on goods traded within his kingdom in 1499.
But the way we use VAT today is different from the way it was in its early days. Originally, it was meant to be used to prevent tax evasion. In countries without VAT (that is, everywhere outside Europe), a merchant can avoid paying sales tax by buying from another merchant and selling from his own inventory. The sales tax on the goods in his inventory is zero but the value added to that merchandise when it changes hands is taxable; thus the added value (or rather, the reduced volume) coincides with the item changing ownership. But this doesn't happen when he buys from another merchant — so even if he sells at full price, he's not taxed any sales tax. VAT was introduced to prevent this from happening.
But we're getting sidetracked. The really important thing here is the fact that it was called value added tax . It makes sense, no? A tax on merchandise with value added to it at each stage of production , right?
And "value added" is a nice way to describe the process, too — value is added at each step in the process of transforming raw materials into finished goods, right? Heck, even "tax" works fairly well — after all, taxes are things you add to a purchase, right?
But this just isn't what VAT is. Instead, VAT is a tax levied on the entire supply chain — that is, the entire chain of production. When you buy a car, it doesn't matter how much it cost to make the body, chassis and chassis components and wiring in your neighbourhood garage — all that's included in the price of a new car. This is not just because we're stuck with "value added" as our name for it — we're also stuck with dealers selling at full price because selling goods from inventory doesn't change ownership. But there's another reason that this gets misunderstood.
A tax on every stage of production is actually an entirely new idea that hasn't been used anywhere before (at least when we consider modern economies). It's part of the idea behind the European Single Market — you see, that market is intended to eliminate the need for borders, right? If we have free trade in a single market, then people will be free to travel across borders and buy and sell goods and services. What do you need to make this possible? One word: harmonization.
Harmonization means agreeing on standards and regulations that apply throughout Europe. But this also means eliminating any border controls when crossing between member states. If a country has border controls, then it can demand to see the goods you're carrying, or even search you and the car you're driving. But if harmonization is widespread — if there really is free movement between member countries — then this won't be possible.
Harmonization also includes VAT rates and regulations, which is why members of a single market need to have set VAT rates. In general, this implies a sliding scale. That's why VAT was introduced — it was an attempt to arrive at a harmonized tax rate that would be high enough to be revenue-generating but low enough to avoid creating too much bureaucracy. And that's why we call it "value added tax".
But that doesn't mean it's right. After all, taxes in general shouldn't be focused on the value added to goods but on the use of resources. It's more efficient — you don't have to know how much it cost to produce each and every one of the parts that go into a product — and it's simpler because you can just hit everyone with a flat rate regardless of what they do with those resources. It also solves a lot of other problems since it doesn't matter if you're producing at home or overseas. You're still taxed for using up resources, not for adding value.
So why don't we do this? Well, we do — sort of. Our tax system is effectively a VAT, and in practice it more closely resembles a land value tax, which is really just a way of raising the same amount of money with less hassle. But we call it income tax instead of land value tax (or "land rent" or whatever) because land isn't property — it's a naturally occurring resource. It's not something that you can own or trade.
So our man here didn't know what he was talking about — he was just complaining about our taxes for no reason other than that that's what people do. He didn't even get his hyphenation correct.
But just because this man was a moron doesn't mean that we shouldn't do anything about it — and I want to. So here's an idea for you: a tax on land value, which would be paid by the owners of all land, like homeowners and landlords. Let's call it the Land Value Tax (LVT) .
This would work like this: let's say you're in the top 1% of incomes in Britain — that is, you have a household income of just under £200,000, or €218,000 at current exchange rates.
Conclusion
I'm afraid that, like the man in the video above, we're currently not paying our fair share of taxes. This is something that we need to fix.
When I came to university I was told that I would have to pay taxes — but when I did and checked with my professor afterwards he said, "Oh no, you don't need to pay taxes. That's only for the very poor." He saw me as someone who was "ahead of the curve" — a lucky beneficiary of good luck and hard work.
But this isn't how things should be for all people at all times.
Tags:
VAT Flat Rate Scheme