From: MCMASTER@LSTC2VM.stortek.com (Jim McMaster)
Subject: Re: Citizens for Tax Justice (was Re: Jerry Brown's Tax)
Organization: StorageTek SW Engineering
Date: Tue, 7 Apr 1992 15:52:30 GMT

In article <1992Apr5.202226.22136@udel.edu>
lintz@fred.cis.udel.edu (Brian Lintz) writes:
 
>Despite what Clinton says the Value Added Tax is NOT a sales tax,
>it is a tax on the profits of business. Some people claim that
>the 13% will be passed on, but there are two arguments against
>this. First, right now businesses pay a corporate tax of 35%, which they
>would no longer pay under Brown's system. Do they pass this 35% on
>to the customer? If they do, then they will only pass on 13% instead
>of 35% under Brown's system. If they don't now, what makes you think
>they will under Brown's system? Second, the market determines the price
>of the item. If a business could raise its prices by 13% and still turn
>a nice profit, don't you think they would? They won't raise their prices
>if people stop buying their product because it costs more than they're
>willing to pay.
>
>
>
>Brian Lintz
>lintz@udel.edu
 
No...the VAT *IS* a sales tax.  At each level of production, a company
pays a tax on the amount received on sales of its goods, minus the cost
of purchases on which another company has alread paid the VAT.  For
example, if National Widgets sells 1000 widgets at $10 each, but has
paid $5000 to Standard Sprockets for components, the total VAT due is
$5000 * 13%, or $650.  There is no deduction for labor costs or other
expenses incurred while making the widgets.
 
It will be tacked onto the price of the goods sold, to the extent the
market will bear, just as are current taxes.  Remember, *NO* corporation
ever pays a penny of tax.  They are merely collectors of taxes who
forward them to the government.  If the market will bear it, the entire
tax is passed on to the consumer in the form of higher prices.  If not,
the owners or investors in the company pay the tax in the form of lower
dividends.
 
As for the 35% vs 13% comparison, this is completely irrelevant.  The
VAT taxes an entirely different number.  With the current corporate
income tax, the company can deduct labor costs, which means they pay
35% of a smaller number, rather than 13% of a larger one.  Whether the
total tax bill goes up or down depends on the labor cost involved in
producing the product.  If the product is very labor-intensive, the loss
of this deduction would result in a higher tax bill, even with the lower
rate.
 
I think Brown has not analyzed his tax plan well enough to know what the
consequences are.  I don't know either....I am not equipped to do any
kind of detailed analysis.  I would like to hear more about his plan, but
the rates he is proposing strike me as too low.  I fear they would add a
huge amount to the deficit.  The VAT is an interesting idea.  It taxes
consumption instead of investment, which is good, but it may severely
hurt the poor.  A gross income tax might be a good idea, but rates should
be graduated, in my opinion.  The flat tax rate does not appreciably
reduce the complexity of the system.  When you compute income taxes, the
major portion of the work is in figuring out exactly what your income was.
Once you have that number, the tax calculation is a simple table lookup,
which is not simplified by the flat vs graduated rate.
 
Jim McMaster