From: solomon@chaos.utexas.edu (Thomas Solomon)
Newsgroups: alt.politics.elections
Subject: A VAT is NOT a profit tax (was Re: Citizens for Tax Justice)
Date: 11 Apr 92 21:18:40 GMT
	<6APR92.02212324@umbc2.umbc.edu> <1992Apr6.171650.25690@udel.edu>
Organization: Center for Nonlinear Dynamics, University of Texas at Austin
In-reply-to: lintz@fred.cis.udel.edu's message of 6 Apr 92 17:16:50 GMT

In article <1992Apr6.171650.25690@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. 
   . . .

   This is how it works in Europe, maybe, but as I said, it is a tax on
   the profits of business. A business takes its income, deducts the costs
   of materials, etc, and multiplies by 13%, and that is how it will pay
   taxes. Either Clinton doesn't understand this, or yes, he's been
   lying.

   . . .

   But its not 13% regardless of losses. The tax is on the PROFITS. If
   there less profits, there is less tax to pay; if there is no profits,
   there is no tax to pay.

Clinton is not lying about the VAT, and he understands it better than
you do, apparently.  The VAT is NOT a tax on profits.  As you state
yourself, and as Brown states in his campaign material, the VAT is
determined by having a business take its gross income, deduct the
costs of materials purchased by the company (from other VAT-paying
companies) to produce its product, and multipy by 13%.  The amount
here that is being multiplied by 13% (the "value added") is not the
profit that a company makes.  Note that the only deductions are those
for materials bought from other VAT-paying companies.  This does not
include employee salaries and benefits.  

To determine a company's profit, you take the gross income, deduct the
costs of materials, etc, and _then_ you deduct the salaries, benefits,
etc., paid to the employees (including the management people), deduct
the money paid to shareholders, etc.  The profit that a company makes
is MUCH smaller than its total "value added."  For example, GM _lost_
a few billion dollars last year.  So there is no corporate tax for GM
to pay in this case (since there is no profit).  However, if you
figure out how much value-added money would be subject to a VAT, take
the receipts from the car sales (to dealers), and subtract off the
price of the components that GM bought to build the cars (including
tools and stuff to build the car with).  This amount will be a
positive number, since employees salaries are  NOT deductible from VATs.

There are other examples of situations where value-added money is
much larger than profit.  Service-oriented industries are the best
example.  In this case, there is almost no capital costs (no materials
to buy to put into your product), so employee salaries form a much larger
percentage of a company's debits.  Let's say I run a lawnmower repair
company.  My company's product is a service, so there are no raw materials
that I need to buy to make the product.  (Of course, I need to buy
paper and typewriters and computer disks for bookkeeping, but this
is not too much.)  Let's say that my company make no profit.  In other
words, all payments made to the company go to employee salaries and
benefits, except what is needed to buy tools and paper ...).  The
company's profit is zero.  But the value-added amount is close to
the full amount of the money that we bring in.  Again, employee salaries
are not deducted when determining value-added taxes.

All of this business about comparing a 13% VAT to the current 35%
corporate tax is comparing a moderate percentage of a HUGE number to a
larger percentage of a MUCH smaller number.  _Of course_ corporations
pass on the costs of the current corporate taxes to the consumer.  But
since profits are so much smaller than value-added money, the amount
passed on with the current system is much smaller than would be passed
on with a 13% VAT.

But wait.  There's more!  It is important to remember that the
value-added tax would be assessed at all stages of the production of
an item.  So, when GM builds a car, they deduct from their VAT
payments the amount they spent on the raw materials that went into the
car.  But the company that GM bought those raw materials from paid a
VAT on those raw materials.  The bottom line of all of this is that
when you add up the TOTAL value added to a product (accounting for all
stages of production), you end up with the TOTAL value of the product.
So, a value-added tax of 13% ends up being a tax that nets the
government 13% of the total value of the product (i.e., the sales
value).  The fact that different companies are paying different pieces
of that 13% doesn't make it less than 13%.  And each company will
pass on the extra production cost (due to the VAT) to the next company.

So, Clinton is correct.  The VAT is very close to being a national
sales tax.

                     Tom Solomon
                     solomon@chaos.utexas.edu