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Historically, the capitalist state extracted revenue from the ordinary person mainly by taxing his income (or earnings). The government required his employer to subtract the tax before paying the employee his wages. The whole of what the employee earned (what is officially called his gross income) thus never actually passed through his hands. The tax portion of it was passed straight to the government by his employer. The part he actually received was called his net income. This he could spend as he wished.
However, the burden of tax is now gradually being steered away from the producer (or earner) towards the consumer (or spender). Tax on income or production is gradually being phased out. It is being replaced by a tax on consumption. Before, the producer or earner received only part of what he actually earned, the other part being deducted at source as tax. After, the producer or earner will receive all that he earns. He will not be taxed until he spends it. Then he is only charged tax on what he spends.
With income tax, government gets its slice of the money as soon as it is earned, and can therefore put it to immediate use. With consumption tax, government gets its slice only when (and indeed if) it is spent. This stems from the capitalist's sacred philosophy of the virtuous earner who deserves to keep the bounteous fruits of his 'hard work' in full to spend or invest as, when and how he himself (not the government) sees fit.
The hope is that the capitalist-minded individual will spend - and pay tax on - what is necessary to procure his needs and luxuries of life, then invest the untaxed remainder of his earnings in the national economy by purchasing corporate shares. The great flaw in this philosophy is that a high earner could hoard most of his earnings 'under his mattress' indefinitely, thus effectively removing them from the economy untaxed. Statistically, one may surmise, this would not be a problem. Hoarders would be a minority. However, in this world of instant global communication, people are starting to behave less like a vast sea of independent thinkers and much more like a giant flock of nervous sheep. The 'word on the wire' can now transmute armies of risk-taking investors into over-cautious hoarders in minutes.
The human is not an inherently self-sustaining life form. To stay alive, it must consume its needs. It must consume sufficient water, food and clothing. In a sense, it must consume shelter also - or at least, the service of being sheltered. If it ceases to consume, it dies. If it is deprived of sufficient of its needs, its life is shortened. It cannot produce its own needs. They can only be generated by the planet's biosphere. To acquire them, it simply has to gather the fruits of the Earth. It may also have to protect them and work them into more useful forms. This is the essence of the economic process.
By the laws of biology, all are forced to consume the fruits of the Earth to stay alive. By the laws of the capitalist state, however, not all are allowed to gather them. One is only allowed to gather the fruits of the Earth by the leave of he who owns the Earth. Namely the capitalist.
The capitalist acquires his needs of life by requiring of each to whom he grants leave to gather from his domain, a proportion of all that each gathers. For this, the capitalist does not need everybody to gather. He can acquire sufficient by having less than all to gather the fruits of his Earth.
This leaves many barred from acquiring their own needs of life. Their lives can therefore be sustained only by receiving welfare from the state. What they receive is generally known as benefit or welfare. Its magnitude is always set to the very minimum a bunch of well-paid government economists and actuaries compute that the poor actually need to live on. The proportion of the fruits of the Earth which the capitalist system affords to different individuals thus varies arbitrarily by many orders of magnitude.
The human frame, on the other hand, rarely varies in size by more than a factor of two. Hence, neither do its vital needs. Thus, what a man 'needs to live on' is independent of his wealth and income. Consequently, a tax on consumption taxes the poor man on his needs of life exactly the same amount as it taxes the rich man. It is true that some basics, such as unprocessed foods and children's shoes, are free of consumption tax in certain states. However, they are not in others. As all states gravitate towards inevitable tax harmony, will tax on the basics of life be repealed in those states in which it is already in force, or will it be enacted in those states where currently it is not?
The individual has no protection against the enactment of irresponsible tax law. So idiot legislators could easily levy a tax on pre-packaged or pre-processed foods, on the blind assumption that the poor can always stick to loose-sold basic food. But this is so. I live in a very expensive up-market commuter area. It became thus long after I moved there. Being long-term unemployed, I cannot afford to move out. Besides, I know of nowhere I could move to. As a result, my local supermarket caters for its rich majority clientele. This is making it ever more difficult to find cheap unenhanced basics.
Tax on consumption in the past was implemented as simply a tax on purchases. It was called purchase tax. In some countries it was called sales tax. Functionally, it amounts to much the same thing, although strictly it is the purchaser rather than the seller who, in the big economic picture, is always the one being taxed.
The problem with purchase tax is that it is very difficult to police. Firstly, this is because it is all collected at the retail point of sale. Thus if an end consumer buys directly from a wholesaler, he could easily get away with not paying purchase tax. The same is true if a do-it-yourself enthusiast buys raw materials or components and assembles them himself. Secondly, the only 'policeman' involved is the tax inspector. And, since the tax is levied on every retail transaction in every retail outlet in all the nation, he has too much ground to cover ever to be effective.
The problem was solved by changing from purchase tax to Value-Added Tax. VAT is levied every time a good or service is exchanged for money. This occurs at every stage of its manufacture and distribution as illustrated below.
When a producer sells goods to a distributor, the distributor has to pay the producer's net selling price for the goods + an extra 17½% VAT. The distributor has to pay both the net selling price + the VAT directly to the producer. The producer then passes the VAT on to the government's department of Customs & Excise.
When a consumer buys the goods from the distributor, he has to pay the distributor's (marked up) selling price + 17½% of that (higher) selling price in VAT. The consumer pays both the selling price and the VAT to the distributor. The distributor then passes the VAT on to the government's department of Customs & Excise. However, before doing so, the distributor is allowed to deduct the VAT he paid to the producer. He only returns the difference to the Customs & Excise department.
The result is that the producer and the distributor do not, in effect, get taxed. Only the consumer ends up being taxed. It all seems to be nothing other than a very complicated way of implementing purchase tax. However, if the consumer is prepared to travel the 200km or so to the producer's factory, he could (in a hypothetical free market) bypass the distributor. With VAT, though, he still gets taxed at 17½% of the value of what he buys. He cannot escape.
There can be many intermediate stages in the trading chain in place of the distributor stage shown above. For instance, several manufacturers may be involved, some making components, some making sub-assemblies, some making finished goods. There may also be wholesale and retail distribution stages. All intermediate participants in the chain charge VAT to their customers, pay VAT to their suppliers, passing on the difference to the government's department of Customs & Excise.
The VAT system is effective because it forces everyone to become his neighbour's tax collector as illustrated on the right.
The government press-gangs Peter to become its unpaid tax collector to collect Paul's tax. If Paul does not pay the tax, then Peter is held responsible. He will have to pay the government and then try to recover the tax from Paul by due process of law, which Peter must finance, and, if necessary, bear the loss.
Again, the government press-gangs Paul to become its unpaid tax collector to collect Mary's tax. If Mary does not pay the tax, then Paul is held responsible. He will have to pay the government and then try to recover the tax from Mary by due process of law, which Paul must finance, and, if necessary, bear the loss.
This must save the government's Customs & Excise department a lot of leg work. It must also drastically reduce the cost of administration compared with a conventional purchase tax. Nevertheless, a rather nasty and insidious little set-up, don't you think?
During the formative years of my business, the VAT laws were a lot harsher than they are now. I would do a good job for a client. I would invoice the client for my work. The client would not pay. I would send a summons. The client still would not pay. The end of the VAT quarter would come. I had to pay to the government the VAT levied on my work. Still the client would not pay. I take the legal proceedings further. Still the client would not pay. The final upshot was that I did a good job for my client, and, short of getting any reward whatsoever for my efforts, I actually ended up paying his VAT as well, plus the abortive legal costs of trying to get the money out of him.
There are ways of recovering the VAT if the client goes bust or if it can be proved that I should grant my client a genuine credit against what I originally charged. However, there is no compensation where a large corporate client simply does not want to pay because the financial director has decided to take the advice of a certain ex cabinet minister and invoke the 'perfectly legitimate ploy' of improving his cash-flow by withholding payment from small suppliers - indefinitely.
This was for me not just one single incident. It was a real and present threat which all to often became a reality.
Some years later, the VAT rules were changed to require very small turnover business to return excess VAT only after they had actually received it from the client. However, though this change was in effect an admission by the law makers that they had made a bad law, no compensation was made retrospectively for the irreparable damage the old rules had caused to people like me.
To be able to charge and return VAT, you have to be registered. Registration is only mandatory, however, if your turnover is above a prescribed threshold. Nevertheless, though your turnover be below this level, it can be an unbearable disadvantage to be unregistered.
If you are unregistered, you have to pay VAT on all your supplies and overheads and, unlike your larger competitors, you cannot claim it back. You pay 17½% more for all your supplies and overheads than they do. This squeezes your profit. Furthermore, if you buy some equipment like a computer from a VAT-registered supplier for resale to a VAT-registered client as part of an IT solution, you cannot even pass on your supplier's VAT charge to your client. You either load the VAT your supplier charged into the net price you re-sell it to your client for, or you stand the 17½% loss yourself.
But all things considered, you cannot trade unregistered and be competitive. Therefore, no matter how small a business you have, you have no choice but to endure the risk of ruination at the hands of Draconian VAT rules.
Even if you are registered and your clients always pay you, VAT is still unfair to those least able to bear it. Like everything else in the capitalist state, VAT rules always favour the rich and corporate.
A good case in point is VAT on petrol. Customers and prospective customers did not beat a path to my door pleading with me to do work for them. I had to go out to see them. My car was the only way I could actually get to see my clients. As a registered person, I claimed back the VAT on part of what I spent on petrol for my car. This part was the mileage I covered visiting clients divided by the total mileage done by my car. This worked fairly until the rules changed.
A VAT notice came through that VAT on petrol was only reclaimable above a certain amount. This varied according to the size of the car. It was based on what government accountants supposed to be the average person's private mileage. As it happened, this 'certain amount' was double what I spent in total for my combined business and private mileage. Theoretically I was clocking up quite a sizeable negative business mileage every quarter in all the not-travelling I did in visiting my clients. The upshot was that, unlike my larger competitors, I was not allowed to re-claim VAT on any of the use of my car. When I complained to the VAT inspector about the unfairness, his reply was that "Well there are always winners and losers." Again, default in favour of the rich and powerful. The losers always seem to be the same people - the small and the poor.
Tax on consumption penalises the poor. It leaves those dependent on state welfare especially vulnerable. State 'benefit' levels are very bare boned finely-tuned quantities. Their relationship with VAT is an astronomically complex dynamic. The linear equations and economic vectors of government economists cannot possibly model it with sufficient accuracy to guarantee the economic protection of every benefit-dependent individual in every possible circumstance. An altogether different approach is needed.
Tax on consumption is a very unfair and dangerous form of taxation which rewards the rich, frustrates those in the middle and stifles the poor.