If you have been around the net, you may have heard about the “Value Added Tax” or VAT. But what is that? Simply put, every time value (as determined by whoever is in charge of the tax) has been added to a product, a tax is accessed. If a product has value added three times, it would be taxed three different times. The tax amount could be the same each time or it could vary depending on how the VAT is set up. For example:

  1. A tree is cut down in the forest, limbs trimmed, and hauled off-site to a lumber yard. A tax is added because value has been added.
  2. The tree is made into lumber (2×4, 4×4, etc.). A tax is added because value has been added.
  3. The lumber is sold to a manufacturer who turns the rough lumber into smaller wooden pieces (cutting, sanding). A tax is added because value has been added.
  4. The small wooded pieces are sold to another manufacturer who then turns the pieces into a box. A tax is added because value has been added.
  5. The box is sold to another manufacturer who takes the box and turns it into a music box. A tax is added because value has been added.
  6. The music box is sold to a local craftsman who paints it and finishes it. A tax is added because value has been added.

In the example above, the item would have been taxed six times before being sold (with a sales tax added at point of sale, making it taxed seven times!!). And although it is touted as a manufacturing tax, it is ultimately the consumer who will pay all the accumulated taxes. My Dad did his MBA thesis on the VAT tax. His conclusion, and mine, is that this is an economy killer. Not only  does the tax burden increase, but the cost of complying with all the regulations is burdensome. Every manufacturing step has paperwork, oversight, and regulations. The cost of doing business will escalate.

On the bright sight, it will make us all savers because we will not be able to afford to buy things!

Categories: Tax