3
$\begingroup$

The USA has a sales tax which is applied at the point of sale, in states which have a sales tax. During the Democratic Party primaries, one of the candidates, Andrew Yang, proposed moving to a Value Added Tax (VAT), which his platform claims to be in place in 160 countries.

It terms of process, it seems that with a VAT, companies must charge the end tax even when selling to other companies, but only pay the tax collection agency the difference in what was collected and what was owed. With a sale tax, it seems that companies do not collect any tax when selling to other companies

Hence, what is the difference between a sales tax and a VAT in terms of the amount of taxes collected? It seems that in both cases, the taxes are only applied to the end consumer.

$\endgroup$
  • 1
    $\begingroup$ VAT is applied at every stage, not just the end consumer, but businesses can reclaim VAT on their inputs so avoiding double taxation $\endgroup$ – Henry Aug 7 at 23:17
3
$\begingroup$

Economically speaking the taxes are equivalent. There should not be any difference in collected tax between them in principle. However, in practice these differ in terms of what administrative burden they impose on firms and more importantly how easy it is to avoid paying taxes under each system. This can ultimately have some effect on the revenue that is collected.

Arguably under VAT government gets to collect more information that can be used during audit to stamp out tax fraud. On the other hand since under VAT companies get rebates on VAT they payed their supplier there are opportunities for companies to commit some additional tax frauds such as trading fictitious software between each other to reduce their tax cost or even receive VAT rebate from government.

This being said it is argued that on the net VAT is more efficient, especially when government wants to set consumption taxes relatively high (as when taxes are small the incentive to commit fraud is small as well). You can find some discussion of further pros and cons of each system in Zodrow (1999).

Addendum: as Brian points out in comments in practice most nations with sales tax have smaller coverage than VAT but this is a result of political decisions rather than any inherent property of either VAT or sales tax. There is no a priori reason to think VAT would solve the political issues itself. Moreover, even though VAT is efficient at higher rates it’s mainly the tax rate rather than coverage that creates the efficiency argument.

| improve this answer | |
$\endgroup$
  • 1
    $\begingroup$ Sales taxes rarely have total coverage of final sales, they are on targeted sets of consumer goods and services. A VAT hits business-to-business transactions that might never have translated into transactions that are subject to a sales tax. $\endgroup$ – Brian Romanchuk Aug 8 at 1:29
  • 1
    $\begingroup$ @BrianRomanchuk it’s true that in the US sales tax does not have the same coverage as VAT in Europe but that’s a political choice. A Germany could decide to apply VAT only to apples and leave all other goods tax free - that’s a political decision it’s not an inherent property of sales tax or VAT. And also I agree on that other point that’s by giving government more information about economic transaction but the tax base for VAT and Sales tax ignoring avoidance and other practical considerations is equivalent - that’s generally agreed upon you can see the paper I cited and sources cited there $\endgroup$ – 1muflon1 Aug 8 at 1:34
  • $\begingroup$ But that was true for sales taxes in Canada as well. In practice, sales taxes did not have total coverage. You are inventing a hypothetical sales tax that has total “final sales” coverage. Since this tax does not exist, people contrast existing sales taxes to VAT’s. $\endgroup$ – Brian Romanchuk Aug 8 at 14:53
  • 1
    $\begingroup$ @BrianRomanchuk but in practice there are VAT systems that don’t have total coverage either. Also again that’s a political decision USA could tomorrow decide to make federal 5% indiscriminate sales tax. Furthermore, if there is strong political reason why sales tax is not applied widely VAT does not solve those political issues. Also the OPs question was general if OP would ask whether in principle tax revenue is different for sales tax that covers only some goods and VAT that applies to all indiscriminately I would answer differently. But as I read it the question was general one. $\endgroup$ – 1muflon1 Aug 8 at 15:21
  • $\begingroup$ @BrianRomanchuk by the way I also explicitly included that in the answer to address it $\endgroup$ – 1muflon1 Aug 8 at 15:33

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.