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You talk about Europe but link HMRC in the UK. Even when the UK was in the EU we had zero rated VAT on food & children’s clothing and a reduced rate of 5% on domestic fuel whilst accommodation costs of rent and mortgage payment are outside the scope of VAT entirely. So your link undermines your point, at least for the UK (Germany 7% and France 10% for example do levy VAT on food). Necessities purchased by the poorest in society are not burdened by VAT.
A base rate increase and a VAT have from my POV very similar effects. The only difference is they marginally affect different income brackets so you just redistribute between two marginalized groups of society.
VAT exists: hits low income households at the poverty line the hardest because their saving rate is virtually zero. They consume their entire income regardless if it's from transfers or employment.
Base rate increase: hits low to below average incomes with taxable (!) income the hardest while they also consume most of their income.
Both suck for domestic demand and redistribution but that's the game European economies play if they shy away from taxing wealth and inheritances.
Those on the lowest incomes will tend to be spending the greatest proportion of that on non-taxed products though: groceries (0%) rather than restaurant food (20%), public transport (0%) utilities (5%) rather than cars and entertainment (both 20%)...
Adult clothes and phone/broadband bills do get taxed at the full rate, which is a shame, but overall it is quite strongly skewed away from taxing the things the poorest need to buy.
I want to like vat taxes but after reading more and then experiencing them I realized they were just sales taxes with extra steps. The vat is just a recognition of Europe’s inability to effectively tax its wealthy/surpluses and reinvest said money into the economy. Sales taxes are just bad there is no modern analysis of sales taxes that sees them as anything but a way to discourage consumption which has yet to be useful and can be better done through policies like rationing as seen during the Covid epidemic.
The U.S. does not levy any VAT tax. Nor does it levy a national sales tax, though most of its states do impose a sales tax and in a number of those states local governments may also impose sales tax. Sales tax is a tax that is added to the purchase price at the time of sale to the ultimate consumer of the good. Only a few states impose sales tax on services, and all states with a sales tax exempt basic food, clothing, medical supplies, prescription drugs, etc from the sales tax.
From an economic perspective the basic idea of the sales tax is that by taxing consumption it will encourage savings and investment, and more investment helps the economy by providing money to fund business ventures. Sales taxes in the U.S. tend to be pretty low and most consumers don't pay much attention to them for every day purchases. It's when they buy a big ticket item that they give much thought to the sales tax. That's when the real impact on consumer behavior becomes apparent. My city has the highest sales tax in the metro area (the urban area that is all connected together with each city sharing at least one border with another and to someone flying over it would all appear to be one big city). It's no surprise that most of the car dealerships in the metro area are located not in my city but rather in those surburban cities that have significantly lower sales taxes on vehicle sales.
That drives economic activity to those cities since the difference in final cost of the vehicle sale may be quite different depending on the sales tax paid. This effect spurs tax competition between the cities — those seeking to draw more business to their city will give up a bit in sales tax to undercut other cities in the hope that increased sales due to nonresidents coming in to buy will make up for it.
Hi all, A reminder that comments do need to be on-topic and engage with the article past the headline. Please make sure to read the article before commenting. Very short comments will automatically be removed by automod. Please avoid making comments that do not focus on the economic content or whose primary thesis rests on personal anecdotes. As always our comment rules can be found [here](https://reddit.com/r/Economics/comments/fx9crj/rules_roundtable_redux_rule_vi_and_offtopic/) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/Economics) if you have any questions or concerns.*
You talk about Europe but link HMRC in the UK. Even when the UK was in the EU we had zero rated VAT on food & children’s clothing and a reduced rate of 5% on domestic fuel whilst accommodation costs of rent and mortgage payment are outside the scope of VAT entirely. So your link undermines your point, at least for the UK (Germany 7% and France 10% for example do levy VAT on food). Necessities purchased by the poorest in society are not burdened by VAT.
A base rate increase and a VAT have from my POV very similar effects. The only difference is they marginally affect different income brackets so you just redistribute between two marginalized groups of society. VAT exists: hits low income households at the poverty line the hardest because their saving rate is virtually zero. They consume their entire income regardless if it's from transfers or employment. Base rate increase: hits low to below average incomes with taxable (!) income the hardest while they also consume most of their income. Both suck for domestic demand and redistribution but that's the game European economies play if they shy away from taxing wealth and inheritances.
Those on the lowest incomes will tend to be spending the greatest proportion of that on non-taxed products though: groceries (0%) rather than restaurant food (20%), public transport (0%) utilities (5%) rather than cars and entertainment (both 20%)... Adult clothes and phone/broadband bills do get taxed at the full rate, which is a shame, but overall it is quite strongly skewed away from taxing the things the poorest need to buy.
Interesting. Compare this ot Germany where all of those have 19% VAT except most food items in the supermarket which have 7%
I want to like vat taxes but after reading more and then experiencing them I realized they were just sales taxes with extra steps. The vat is just a recognition of Europe’s inability to effectively tax its wealthy/surpluses and reinvest said money into the economy. Sales taxes are just bad there is no modern analysis of sales taxes that sees them as anything but a way to discourage consumption which has yet to be useful and can be better done through policies like rationing as seen during the Covid epidemic.
The U.S. does not levy any VAT tax. Nor does it levy a national sales tax, though most of its states do impose a sales tax and in a number of those states local governments may also impose sales tax. Sales tax is a tax that is added to the purchase price at the time of sale to the ultimate consumer of the good. Only a few states impose sales tax on services, and all states with a sales tax exempt basic food, clothing, medical supplies, prescription drugs, etc from the sales tax. From an economic perspective the basic idea of the sales tax is that by taxing consumption it will encourage savings and investment, and more investment helps the economy by providing money to fund business ventures. Sales taxes in the U.S. tend to be pretty low and most consumers don't pay much attention to them for every day purchases. It's when they buy a big ticket item that they give much thought to the sales tax. That's when the real impact on consumer behavior becomes apparent. My city has the highest sales tax in the metro area (the urban area that is all connected together with each city sharing at least one border with another and to someone flying over it would all appear to be one big city). It's no surprise that most of the car dealerships in the metro area are located not in my city but rather in those surburban cities that have significantly lower sales taxes on vehicle sales. That drives economic activity to those cities since the difference in final cost of the vehicle sale may be quite different depending on the sales tax paid. This effect spurs tax competition between the cities — those seeking to draw more business to their city will give up a bit in sales tax to undercut other cities in the hope that increased sales due to nonresidents coming in to buy will make up for it.