Value Added Tax Concept

1055 Words5 Pages
The Value Added Tax: Concept, Structure and Effects Taxes have been around since the old kingdom of Egypt, Roman, and Persian Empires. Taxes took many forms through the years as inheritance tax, transfer tax, expatriation tax, etc. The sole purpose of imposing taxes is to raise revenue to fund the government so it can provide services for the citizens such as health-care system, public transportations, etc. Half a century ago a breakthrough change occurred in the taxation system after adopting an indirect consumption tax in a form of value-added tax (VAT) by France in the 1950s. Through the past years, the VAT has proved its efficiency comparing to old taxes like sales tax by many analyses that had been done and over than 160 countries adopted…show more content…
VAT works best when there is a single rate which applies to all goods and services without exception as Tait has argued in his book, VAT: International Practice and Problems, “As the number of rates increases, tax forms become much more complicated and not only the chance of error, on the part of both taxpayer and tax officials, becomes much greater but the potential for evasion rises rapidly as well” (Tait 42). Unfortunately, having only one standard rate for value-added tax for all products will make VAT a regressive tax. As the amount of money paid by the consumer depends on the product’s price rather than their incomes, which makes this tax unlikable by the low-income people. Hence, politicians like to introduce other reduced rates than the standard rate to make this tax more agreeable than other…show more content…
First, forecasting the prices after imposing a value-added tax assuming perfect competition. Perfect Competition. When there is an increase in a value-added tax in a perfect competition both the seller and the buyer will be affected directly as the price of goods will be determined by demand and supply. When companies increase the rate of VAT or impose a value-added tax for the first time, they will raise the price of their products by the same amount of tax payment in order to keep their revenues level constant, same as before imposing a tax. Thus, affecting the demand and supply curve as Dijkstra explained in his paper “Under perfect competition, taxes cannot be over-shifted. The tax shifting parameter (the degree to which a tax increase is shifted onto consumer prices) is always less than or equal to 100%” (Dijkstra

More about Value Added Tax Concept

Open Document