This type of comment makes HN the best forum for discussion on the Internet.

The number of times I’ve heard someone say “_____ is not like it used to be”, or “it’s harder to find ____ in (name community/event/location/etc)” is significant, and even when it’s true short-term, it rarely pans out long-term unless that very thought spreads to enough people that it becomes a self-fulfilling prophecy.

Like do what you want it’s your life. I’m just saying what I’ve seen.

1. Small introduction briefly mentioning that while exemptions do exist for business inputs, tax systems often fail to have exemptions in all the cases that they ought to (ie the cases that would be exempt under a VAT regime), including four links to estimates of these failures

2. Mention that the real world lies between the following example and a true VAT system.

3. Detailed toy example of the effects of these inefficiencies (ie in the cases where the exemptions do not apply)

4. Brief discussion about reasons for the current system

I’m going to guess that the reason you missed this is that two key points of the argument are hidden in the introduction and the article is dominated by the (perhaps) less important worked example. But maybe you think the claims in the introduction are so obviously false that you don’t see any need in mentioning them, or maybe they were added to the article after you read it.

https://github.com/dyno-might/dyno-might.github.io/commits/m...

I didn't change the article between submitting and the time you made your comment. I did just add two paragraphs to the end of the "Before We Begin" section to try to clarify this point. (Your interpretation was what I intended.)

I can imagine that pointing out some (hypothetical) tax where rates aren’t marginal could get a similar reaction here (ie lots of “OP doesn’t understand marginal tax rates, but that’s ok because lots of people are stupid,” rather than “oh dear, that’s not a very good tax system, I wonder how that flaw slipped through.”)

Everything about it sounded wrong to me, but I couldn't imagine someone taking the time to write up such a detailed blog post without either being a state/local tax expert, or consulting with experts prior to writing this.

I hope that the author can learn more about the topic and revise the post, so that more people are not led astray by incorrect theories and examples that are detailed but not accurate at all.

Can you please take a look at this article and let me know if it changes your view:

https://www.cost.org/globalassets/cost/state-tax-resources-p...

- The paper talks about business inputs, which is anything a business purchases. Businesses need to pay sales tax on items, unless they are intended for resale. So they're going to be charged sales tax for the coffee machine for the break room for example.

- I disagree that sales tax is a "household consumer"-only tax. It's just a consumption tax. No state exempts all business purchases, so this extra "household" bit is a position they're pushing. Part of their argument is similar to other anti-business tax policy papers that think tanks in the US put out regularly. The argument goes: businesses must pass all costs to consumers, therefore business taxes increase costs to consumers, therefore businesses should not be taxed since it's really consumers that pay those taxes.

- This is the pyramiding they refer to: Business needs to pay sales tax on coffee machine. If they pass this cost on to consumers, they'll increase the price of their products by a fraction of a cent, and that increase will increase the sales tax the consumer must pay (sales tax on that fraction of a cent).

- I'm not surprised by the high percentage of business purchases paying sales taxes. As the paper mentions, 79% of consumer purchases are sales tax exempt (items like food). Of the remaining 21%, many of those items are utilized by businesses.. items like desks, computers, etc. The high percentage of sales taxes being paid by business is likely due to the shear quantity of household purchases that are exempt.

- On the comparison to a gross receipts tax: If I sell pencils (an item generally subject to sales tax), I'm collecting sales tax on many purchases. The difference is that GRT would tax all revenue, versus sales tax would have exceptions for resale, sales to schools and other exempt organizations, sales shipped to areas without sales tax (or where a business doesnt have a nexus), international sales, etc. So to make the comparison work, we need to be very careful about defining the business: I sell pencils locally to end consumers, and I interrogate each customer to make sure they're not affiliated with a school, won't try to resell my pencil, etc. Once we do that, the comparison gets pretty ridiculous. In practice, these are two different tax regimes, and only by glossing over the differences can we make them sound similar.

- On vertical integration to avoid sales tax: This is a very specific scenario that I don't imagine happens too often. A business that sells X, but uses a lot of Y for some purpose not related to producing X. Additionally Y must have a very high markup (if not, the acquirer will be paying sales tax on the inputs for Y, and will save nothing on sales tax). Maybe my imagination is lacking... but I'm having a hard time coming up with a scenario where this would occur and it would be the sales tax (5-8%) that would be the deciding factor on whether to vertically integrate.

My take on this paper is what I mentioned in my 2nd point... it's an anti-business tax paper written to encourage governments to cut business taxes. You can decide your position on that. I generally think businesses should pay taxes.

FWIW, many/most states exempt services, so sales taxes are generally much more limited than a true consumption tax.

How does it provide a vertical integration incentive? Sales tax is only applied at the final step (or rebates if applied before that). The main integration incentive is the ability to reduce margin at each step (if needed) and have tighter supply chain control.

Let’s be explicit and instead of talking about sales tax which the article claims sometimes acts like VAT and sometimes like a gross receipts tax and instead use those terms explicitly.

In the gross receipts tax regime, tax is applied at every boundary between businesses and so having fewer of these boundaries (ie being vertically integrated) gives a lower final price with workers receiving equal pay. In this way, the tax system incentives vertical integration.

In the VAT regime, the final price and total tax paid is the same whether or not the business is vertically integrated, and so the tax system doesn’t incentivise one option over the other.

The key point is that we first compare two competing business structures under the same tax system, and it turns out the tax rate doesn’t affect the argument so long as it’s positive, and then we compare how those structures relate to each other in different tax systems (where the rates don’t matter because they don’t change the relationship between the structures that both live under the same rate)

The gross receipts structure is used instead of business income tax in some areas and is a separate thing from sales tax. Conflating the two doesn't help anything.

The author's link to support the structure that collects sales tax at every step is really gross receipts. Perhaps there's a better site with a good example and a link to a sales tax structure that exists as they depict it in this article. Even if it did work that way, the primary drivers for vertical integration would be the option to shrink the margins at each step and supply chain control (quality, moating, etc).

Is there an article discussing the differences in policies and rates of vertical integration between counties and the effects of it? It might be better to show that, rather than this article.

I stopped reading the article at "The Sales Tax Regime": it's just wrong. It's not how taxation works for the most part in the supply chain. Not that this was the only problem to this point in the article. The opening point about the "rest of world" is itself one of the classic informal fallacies: argumentum ad populum. At that point it became clear to me that the author didn't have anything on offer that I would learn from.

There is a real problem with sales taxes in the US, but its not found in the article. The problem is the complexity. While there are broad rules of thumb that allow us to generalize that products sold as raw materials or for resale aren't taxed: there are many very nuanced exceptions. Sales taxes and exclusions/inclusions of same are determined at the city, the county, and the state level individually: all with different rates and rules and reporting schemes. And then introduce things like sales tax holidays and the like and get these changing constantly and it's amazing that any of us in the business aren't in prison for tax evasion.... whole companies exist just to keep up with it all. Now of course, that's not just limited to "the sales tax regime". The most difficult tax rule I ran across in retail was in Canada. British Columbia had a rule at the time that certain classes of clothing being sold to children 14 years or younger between certain dates (in the fall as I recall) didn't have to pay the provincial tax (GST applied however)... I might be remembering some details wrong: that was the mid 90's. But getting a general purpose point of sale system to enforce that in a general sort of way was an interesting challenge.

So if I buy something, then sell it later, that first purchase should be considered a "resale" purchase, right?

In fact, if you can't provide a reseller's certificate (or license, the exact term depends on the state) then the seller generally must collect a sales tax on the sale.

However, you can only deduct items so acquired for business purposes, not for personal purposes.

I think this means that paying $10 would reduce your income tax by $3 (if income tax is 30%). This is different from getting a 100% credit ($10) which is what you'd get with a VAT system.

If for some reason you can't offset your input VAT, then you get the same deduction against your income as you would for a sales tax, because it's part of your expenses. BUT NOTE: that if the acquired good is depreciated, then in both cases (VAT or sales tax) the tax-related deduction is spread over several years rather than all at once.

Typically you don't pay in the first place, rather than getting reimbursed (EDIT: AFAIK). It also depends on the state, so I can't give a general answer. To give a concrete example, however, I'll use Washington state:

https://dor.wa.gov/taxes-rates/retail-sales-tax/reseller-per...

And here's a deeper link specifically for the actual action of applying for a reseller's permit, as linked in the sidebar of the above page:

https://dor.wa.gov/taxes-rates/retail-sales-tax/reseller-per...

EDIT: Okay, looks like there are deductions / reimbursement options as well, TIL:

https://dor.wa.gov/taxes-rates/retail-sales-tax/reseller-per...

Also, some retailers let you file your resellers license with them and then they don't charge you sales tax because they know you are a vendor who is going to resell it. This system is often abused by small businesses who buy personal items along with their business items and then don't pay tax on their personal items. In theory they have to file use tax at the end of the year (the same use tax you're supposed to file if you buy something out of state and aren't taxed on it), but most people don't.

The complexity (need for so many exemptions) suggests that the fundamental design may be flawed. If you have VAT, you can do with fewer rules.

The simplest form of consumption tax is the (Australian) GST: a flat 10% on almost all goods and services.

I'm curious - do you think this extra complexity is necessary (e.g. extra rules to reduce unintended effects), or is it implementation-specific?

> The simplest form of consumption tax is the > (Australian) GST: a flat 10% on almost > all goods and services.

But isn't Australian GST just a specific example of a VAT system? The Australian government says[0]:

"Generally, businesses and other organisations registered for GST will:

- include GST in the price they charge for their goods and services

- claim credits for the GST included in the price of goods and services they buy for their business."

This sounds exactly like a VAT.

[0] https://www.ato.gov.au/Business/GST/How-GST-works/

2) To say GST is exactly like VAT is to say that an abacus is exactly like a supercomputer because they both calculate things.

A GST is not a VAT. A GST is a goods and services tax, not a "value added tax." The GST only taxes the final value of the product or service sold, similar to a sales tax, not the value added at every step. This is important, because it means that a GST does not try to capture the value delta provided by middlemen, while a VAT does and is deliberately designed to do so. Thus, a VAT impairs the value proposition of utilizing middleman. This makes a GST (or sales tax) significantly more efficient from the perspective of taxpayers, though from a governmental revenue perspective, this also means that GST raises less revenue than a VAT would.

A big issue with sales tax is that reseller exemptions only apply to products acquired with the intent to resell, which means the supplier has to know (or be told) if the products acquired in a transaction will be resold, and this creates complexity for every transaction. So instead, the simple way to do it is that every transaction is subject to GST.

To get legitimate resellers and middlemen back to the economic position of not paying GST, they get to offset the GST paid for goods or services acquired to produce their own products or services against the GST they collect for their goods or services. This is superficially similar to the VAT, except that with GST you're done (yes, it's really that simple), whereas with VAT you've still got way more work to do.

(Note that I have spent the last several years handling both GST and VAT compliance. You will not convince me or any other tax professional that a GST is anything like a VAT except in the most superficial ways.)

The UK has VAT. It does not impair the value proposition of utilizing middlemen. When a consumer buys something for £120, £20 of this is VAT, and will be remitted by the retailer to HMRC.

Now, relevant to your point is this: the retailer claims a credit for any VAT she paid when she bought the goods from a middleman. And that middleman will claim a credit for any VAT he paid when he bought from the other middleman. The VAT charged on each transaction in the chain is eventually claimed back. So whether is 1 middleman or 100, VAT does not cause any tax drag. In other words, the existence or number of middlemen in the chain does not change the total amount of VAT collected by HMRC on a consumer's purchase of £120 (£100+VAT).

My reading of the Australian GST is that the mechanics are similar to the above: i.e. GST is charged on all sales, but that GST-business can claim back any GST they paid on things they used in their business.

So this leaves me to wonder: what are the main differences between the operation of UK VAT (as described above) and Australian GST?

It absolutely does, and I say this as someone with experience dealing with all types of consumption taxes. VAT reduces the usage of middlemen in countries where VAT systems exist.

So whether is 1 middleman or 100, VAT does not cause any tax drag. In other words, the existence or number of middlemen in the chain does not change the total amount of VAT collected by HMRC on a consumer's purchase of £120 (£100+VAT).

VAT requires the middlemen to track and pay VAT at every level. While this is the same as sales tax and GST, compliance for sales tax and GST is far simpler than it is for VAT. (This is true even before you consider multijurisdictional tax issues for VAT and sales tax.) VAT compliance is more expensive, and this cost gets passed on to the customer.

what are the main differences between the operation of UK VAT (as described above) and Australian GST?

The main difference between GST and VAT is that a GST is charged at a flat rate regardless of the value added. A VAT is only charged on the value added at each step.

That is what makes the calculation more complex. Compare, for example, a product sold at $10 by a middleman under GST vs same product sold in VAT jurisdiction. In GST land, the tax is $1 whatever you paid for the input goods. Your GST payment to the government is based on total output GST charged less totoal input GST paid to suppliers of business expenses. Since the rate is flat, you essentially just take gross revenue less gross business expenses and you're done. In VAT land, the tax depends on the price paid for the goods/services that went into the product/service, so you have to know what prices you paid for those to calculate the taxable value delta. And when you reclaim VAT, different categories of VATable expenses have different rules for what can be reclaimed. So it's not a simple calculation; there's significantly more work involved.

Australia's tax system, at least for businesses, is probably the simplest and most efficient tax system in the world (at least for Australian businesses, it's a bit more of a hassle to get registered for the system for foreign companies).

It's a good model for what an ideal U.S. tax compliance system would look like, however, there are some aspects of it (like the BAS and GST netting) that would not scale in the U.S. due to the higher levels of tax fraud we have stateside.

For easy numbers, in the independent contractor model, each person pay $0.30 in payroll taxes (before income tax) while in the employee model, the employee only pays $0.15 and the business pays the other $0.15. If gross pay is $1 in both cases, the employee makes more. Because of this, real employers are going to pay salaries of less than $1 to account for overhead like payroll taxes, office space and the risk of providing a steady paycheck vs. paying per production.

I understand the author is simplifying things to make an argument for VAT but there are lots of variables in both scenarios including payroll tax and the option for retailers to purchase goods without paying sales tax to wholesalers.

1. Dealers (who are buying cars for resale) do not pay sales tax on cars. When you sell a used car to a dealer, the dealer doesn't pay sales tax on it. When you sell a used car to an auto recycler / scrapyard, they don't pay sales tax. If you know of any states that are exceptions, I'd love to learn what those are.

2. A quick Google search (by no means comprehensive, so I could be wrong) suggests that most countries with VAT also charge a land transfer tax.

2. Migrating over to VAT doesn't mean these taxes go away.

3. The only guaranteed consequence for switching to the VAT system is that taxes will become less transparent, so they will likely increase.

So, at least for sales taxes, it is easier if everyone just pay it and the claim it at the end. It's the same as income taxes, where a set amount is deducted on a pay check and the taxpayer gets a refund at the end of the year.

Costs are not a significant factor in the prices of market goods - that is dominated by supply and demand.

This is covered in the article: "a retailer usually won’t pay sales tax on a manufactured good they intend to a consumer in the same form."

For a really clear example of this, many states have a sales tax exception for equipment that will manufacture goods for resale. So in that case, the equipment never even made it into the final product, except by touching the item that was sold. Equipment has a lifetime, and it's consumed by producing items for resale... so it's exempt.

If I purchase raw material to turn into a final product, that raw material is sales tax exempt.

Even then it can be exempt or removed by other items in the tax code. That profit is not part of the sales tax system. It is part of the income tax system.