VAT cut, will it make any difference?

[Thermal]

sorry i dont quite get that, explain please

[Hosakawa Tito]

sorry i dont quite get that, explain please

What the cartoon depicts is the disconnect between economic policy makers *elected & appointed* and the common family. On the one hand you have the "deciders" with secure jobs, health care, pensions, homes, college educations for their kids, every perk imaginable...saying things like this idiot . On the other are the vast majority that are losing or lost their jobs, homes in foreclosure, the stability & security of their families futures in serious doubt.

[JAG]

I think it will help, better than doing nothing.

I would have prefered direct tax help for lower income groups, but I understand the VAT cut - they are trying to stimulate the economy and more than anythign send a message rather than anything else.

[rasoforos]

Well it WILL help because it increases the disposable income on the demand side on the economy

Something that was not mentioned is that it will also help in the supply side of the economy since businesses will have to pay less taxes to the tax office (and since you pay that tax cash while u might get your money in months it will help them). On their side 2.5% out of 17% is about 15%.

Conserning Hosakawa Tito's cartoon. The sad truth is that there is a conflict of interest. Economic theory suggests that to come out of an economic crisis you gotta encourage people to not drop their spending levels. The governments encourage that by increasing disposable income so the people have money to spend. However, on the supply side, the people would rather use the money to obtain some security for the future (its harder to think about buying a new plasma TV when you might lose your job next month). and 'keep it under the mattress' which, economically speakng is the 'selfish thing to do'.


Another question I saw was 'What the Value added is'

Well to put it simply the VAT is a way for a government to collect taxes without having to do much.

What is taxed is the profit added on each stage of a product's manufacture until it reaches the consumer. It is a producer tax, the consumer is not really taxed.

Lets say VAT IS 20%

i) For example lets say I am manufacturing wooden chairs. I go and buy my wood and my glue and my cloth etc and they are worth 100 euros. My supplier will charge me ( 100+20% VAT) 120 euros. He pays 20 euros to the government.

ii) Now I manufactured my chairs and Nick who owns a furniture store comes to buy them from me. I charge him 140 euros + VAT (140 + 140*0,2) for a total 168 euros. The current VAT is 140*20% = 28 euros but the manufacturer has already paid the 20 euros so I pay 28-20 8 euros to the tax office.

iii) Now Nick puts the chair on display and an Org moderator comes to buy a chair because his old one melt away because he was sitting on it all day reading the forum. Nick decides to sell the chair for 180 euros + VAT for a total of 216 euros. The current VAT is 180*20% = 36 euros but my supplier has allready paid 20 euros and I paid 8 so he has to give 36-20-8= 8 euros

iv) The org moderator enjoys his new chair he bought for 216. If there was no tax he d have paid 180 euros (the price nick is willing to sell the chair if there wasn't VAT). Now as he can see the 36 extra euros can be traced back to the 20 euros my supplier paid and the 8 euros I paid and the 8 euros Nick paid. We were all taxed for the value we added and the government took the money.

Now here is the tricky part!

To the untrained eye it appears that the moderator paid all the tax since he is charged 36 euros extra. Due to the magic of economics that is not the case! Why?!?! you ll scream!

Because VAT rises the overall price level by the amount equal to VAT. Money have the value we perceive them to have (In reality they are worthless pieces of paper with no valuable assets to back them up. The idea that there is a huge vault full of gold somewhere to back up every single dollar out there is a myth). So since the overall price level of the economy was increased , there is no difference for the economically challenged moderator.

Its is sort of the same as to say that we double the price of all products in the market but we also double wages. There is no difference if you make 1000 euros and a TV costs 500 to purchase and tomorrow your wage is double and the price of the TV is doubled too. Your ability to purchase things is not affected.

[Mangudai]

Well it WILL help because it increases the disposable income on the demand side on the economy

Something that was not mentioned is that it will also help in the supply side of the economy since businesses will have to pay less taxes to the tax office (and since you pay that tax cash while u might get your money in months it will help them). On their side 2.5% out of 17% is about 15%.

Conserning Hosakawa Tito's cartoon. The sad truth is that there is a conflict of interest. Economic theory suggests that to come out of an economic crisis you gotta encourage people to not drop their spending levels. The governments encourage that by increasing disposable income so the people have money to spend. However, on the supply side, the people would rather use the money to obtain some security for the future (its harder to think about buying a new plasma TV when you might lose your job next month). and 'keep it under the mattress' which, economically speakng is the 'selfish thing to do'.


Another question I saw was 'What the Value added is'

Well to put it simply the VAT is a way for a government to collect taxes without having to do much.

What is taxed is the profit added on each stage of a product's manufacture until it reaches the consumer. It is a producer tax, the consumer is not really taxed.

Lets say VAT IS 20%

i) For example lets say I am manufacturing wooden chairs. I go and buy my wood and my glue and my cloth etc and they are worth 100 euros. My supplier will charge me ( 100+20% VAT) 120 euros. He pays 20 euros to the government.

ii) Now I manufactured my chairs and Nick who owns a furniture store comes to buy them from me. I charge him 140 euros + VAT (140 + 140*0,2) for a total 168 euros. The current VAT is 140*20% = 28 euros but the manufacturer has already paid the 20 euros so I pay 28-20 8 euros to the tax office.

iii) Now Nick puts the chair on display and an Org moderator comes to buy a chair because his old one melt away because he was sitting on it all day reading the forum. Nick decides to sell the chair for 180 euros + VAT for a total of 216 euros. The current VAT is 180*20% = 36 euros but my supplier has allready paid 20 euros and I paid 8 so he has to give 36-20-8= 8 euros

iv) The org moderator enjoys his new chair he bought for 216. If there was no tax he d have paid 180 euros (the price nick is willing to sell the chair if there wasn't VAT). Now as he can see the 36 extra euros can be traced back to the 20 euros my supplier paid and the 8 euros I paid and the 8 euros Nick paid. We were all taxed for the value we added and the government took the money.

Now here is the tricky part!

To the untrained eye it appears that the moderator paid all the tax since he is charged 36 euros extra. Due to the magic of economics that is not the case! Why?!?! you ll scream!

Because VAT rises the overall price level by the amount equal to VAT. Money have the value we perceive them to have (In reality they are worthless pieces of paper with no valuable assets to back them up. The idea that there is a huge vault full of gold somewhere to back up every single dollar out there is a myth). So since the overall price level of the economy was increased , there is no difference for the economically challenged moderator.

Its is sort of the same as to say that we double the price of all products in the market but we also double wages. There is no difference if you make 1000 euros and a TV costs 500 to purchase and tomorrow your wage is double and the price of the TV is doubled too. Your ability to purchase things is not affected.

!

Your last two paragraphs argue that it imposes no real burden on taxpayers. If that were the case it would grant no real benefit to the government. But it is not the case. The end consumer really does pay the full tax. And the money represents real credit on human labor and everything else money can buy.

VAT taxes and sales taxes are the most economically inefficient taxes. All they do is deter transactions. The cornerstone of efficient markets is that goods flow to the allocations where they are most highly valued.

To run with your furniture example. The chair maker could buy sawlogs or he could buy milled lumber. The chair maker has the ability to mill his own logs, but he is 10% less efficient than the person who runs a sawmill.
Lets say sawlogs cost $100
Milling costs $20 +$4 tax.
Doing it himself costs $22
So the chair maker saves money by doing it himself. If his competitor is otherwise identical, but the competitor outsources milling to the most efficient contractor, then our chair maker can beat the competitior on final price to the consumer.

[Husar]

Its is sort of the same as to say that we double the price of all products in the market but we also double wages. There is no difference if you make 1000 euros and a TV costs 500 to purchase and tomorrow your wage is double and the price of the TV is doubled too. Your ability to purchase things is not affected.

Right, and that is why there is not much of a difference in anything because if the government gets les VAT they will have less money and stop renewing streets and let the people pay for that themselves for example so in the end somehow you pay for that anyway, everytime someone earns more, someone else will either earn less, pay more or have a higher debt and it never ever ends anyway unless you apply some kind of full communism and make everybody exactly the same in which case people lose all incentive to be good or so I hear.

You know when someone takes a mortgage from a bank he will have to pay back more and that is what the bank earns so overall he is poorer, the bank richer and the one who builds the house is richer as well, if he saved the money up front the bank would earn nothing(possibly pay him interest and thus be poorer unless they loan his money to someone else who then pays interest and is then poorer), he would not be any poorer as in the first example and the one building the house would earn exactly the same, now in the first example the guy is complaining how the interest on his mortgage is crippling him and in the second example someone else is complaining how the interest on the mortgage the bank gave him from the first guy's money is crippling him or the bank would be complaining how they do not make money because noone is taking mortgages.

The same applies to wages and prices, everything you get more in wages will be relayed by you company to the customers who will have to pay more but you company will want to make more money to satisfy the shareholders so they raise prices a bit more or try to seel to more people so more people will have less money to buy other things and will demand higher wages because everything is so expensive, then their respecitve employers will raise prices to afford the higher wages and add a bit to satisfy shareholders and then people complain everything has become more expensive and demand higher wages because... and so it goes on and on. I'm not really impressed by any "solution" to all this because it always comes out the same anyway.

[Mangudai]

The taxes have a real impact, and the way the taxes are levied can distort the way society operates.

In my view the most fair taxes are property taxes on real estate, and taxes on natural resources.
Income taxes are moderately fair.
VAT and sales taxes are the most unfair and cause the most interference with positive economic behavior.

You guys are getting hung up on the intrinsic nature of money. Money is credit to other people. It always has been. Precious metals were never the essence of money, though they have been closely linked for a long time and many people confuse them. It would be helpful to think for a few moments about the difference between a barter economy vs. a token economy...

Now lets talk about taxes... In the early middle ages money existed, but the monetary system was dysfunctional. The common peasant seldom got coins and could not monetize all aspects of economic life. Peasants paid taxes directly to their lord in the form of labor. In Western Europe, most peasants had 5 days for themselves, 1 day to serve the landlord, and 1 day of rest each week. This amounts to a 20% tax on their labor, very similar to what we have today. Peasants are good at construction and farming, but their are many things they can't do. Our system of monetary taxes is better inasmuch as a token economy is better than barter, the government can get almost anything it wants not just what the taxpayer has to offer.

In the Middle Ages property ownership was closely linked to military service. This system worked without money. Our system based on money offers the government greater flexibility, but is roughly the same in terms of the burden on society.

Then and now the government makes a direct claim on the natural resources of the country and the labor of its citizens. Making the claims through money gives the system flexibility.