Is the VAT a force behind corporatism?

May 20, 2012  ·  Filed under: vs. VAT Tax

A friend asks on Facebook:

Question for econo-geeks. Is the VAT (value added tax) a force behind corporatism?

Here’s the argument.

I assume the VAT is not collected at each stage of value added within a firm, but only when a firm transfers a good (with its value added) to another firm in the production process. Like a sales tax but between businesses.

Therefore the VAT works to the advantage of large multinationals who do a lot of processing internally, and to the disadvantage of decentralized industries where many separate, specialized firms play a part in ‘adding value’ each step of the way.

This also leads to economies of scale (?) in internalizing steps in the production process (making firms larger) because one can charge a lower price on the final product by not having to mark-up each step of the way to pay for the VAT. Presumably a firm that could do the whole process in-house would only pay one VAT mark-up at the end.

Or does it not matter, since the value added by the firm will be factored into the percentage of the tax regardless of how many times it is applied in a process?

Anyone have insights?

Posted by Joshua Zader  ·  Trackback URL  ·  Link
3 Responses to “Is the VAT a force behind corporatism?”
  1. Joshua,

    Welcome back to the discussions. What used to be the most informative and unbiased blog has been deadly quiet of late. I hope that changes.

    As for the VAT issue, I’m no expert (or econo-geek) but I don’t think it matters if the producer is a large corporation that can produce the item in-house or a series of smaller businesses that each add a part of the final product. Here’s why.

    If the government sets up a 10% VAT, for example, it doesn’t matter if there is one level of production or ten, the total tax collected is still 10% of the final cost. While the dollar value accumulates as a part moves up through the production cycle, the percentage tax does not. As the name indicates, only the value added is important. Many small companies producing a single component of the final item would not be at a disadvantage with one large corporation that produces the end item in-house.

    I’m not certain which producer might have lower retail prices, but I sort of think many small producers, all having lower overhead costs, might win out? Just a thought

    Hank Van Gieson  ·  May 20, 2012 at 4:41 pm  ·  Permalink
  2. I do not think it matters at all, but VAT is not my expertise.

    Each producer in the chain takes credit for VAT paid, by subtracting it from VAT received, so that he remits only VAT on the value he added. So, I think the net result should be the same.

    Stephen C. Eldridge  ·  May 23, 2012 at 4:55 pm  ·  Permalink
  3. Agree with Hank and Stephen…

    Morphh  ·  Jun 15, 2012 at 2:30 pm  ·  Permalink