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.