If you’re a small business, you don’t pay VAT for the invoices you wrote, and your business customers cannot deduct any VAT when they buy from you.
If you’re a big business, you pay vat and your biz customers deduct that vat again from their own vat payments.
It’s all good and fair, no?
I guess that before, the VAT-paying customers were subtracting 10% of their payments to small companies from their VAT payments, as if the small companies had already paid VAT?
That was effectively a Japan-specific subsidy of small businesses with a hard cutoff at 10k.
I suppose that’s why people are complaining: they would like to keep their subsidies.
In Finland and AFAIK all Nordics, all invoices must be VAT inclusive. If you are selling up until 15k EUR year you can do it VAT free, which is too small to be considered a professional business. Alternatively if you are selling services outside the EU (freelancing internationally).
It sounds like it was indeed subsidy for small businesses. I don’t know about Japan, but in some countries like Italy there is a problem of small inefficient businesses. Whether such direct or indirect subsidies are good or not for the economy as whole, to keep these small businesses around, is a good question which may not have a definite answer. Internationally it may reduce competitiveness, but it may be good for local and rural area employment, which increases the quality of life for a very small national cost.
Also there is cost for maintaining the records and adminstration: for 15k EUR/year this cost would be significant % for the actual value adding activity.
Large businesses are inefficient in an insidious way. It's incredibly expensive and inefficient to tax them and get money out of them once you put money into them. This sole problem is why the neoliberal welfare state does not work. Simply making the most powerful organisations around more powerful does not actually force them to then turn around and help the powerless, it actually just makes them more capable of not doing that.
Does favouring small businesses actually reduce international competitiveness? Sure - in the same sense that not subsidising large businesses reduces international competitiveness. But what is the good of having an internationally competitive business you can't get money back out of? What if ItalyCorp decides they are not an Italian company, but actually a company based out of the Canary Islands in no way bound to Italy? Making a business internationally competitive has no point if you can't also make it your vassal, which you can only really do in cases where the business relies on some state resource, and even then a large business is likely to corrupt the government anyways.
Small-Medium sized businessmen by contrast are much much easier to tax once they're past the subsidies. Besides that, they tend to spend relatively large amounts of their in-country in ways that can be taxed efficiently, and on other businesses which can also be taxed efficiently. It makes addressing income inequality more efficient.
> In Finland and AFAIK all Nordics, all invoices must be VAT inclusive. If you are selling up until 15k EUR year you can do it VAT free, which is too small to be considered a professional business. Alternatively if you are selling services outside the EU (freelancing internationally).
There's also VAT reverse charge for invoices when selling goods & services between EU countries where you don't include VAT on the invoice.
> In Finland and AFAIK all Nordics, all invoices must be VAT inclusive. If you are selling up until 15k EUR year you can do it VAT free, which is too small to be considered a professional business. Alternatively if you are selling services outside the EU (freelancing internationally).
Isn't there provision for reverse charge (effectively zero VAT) on B2B transactions where both parties are within the EU?
It‘s not zero VAT. It just reverses who has to pay the VAT. E.g Microsoft invoices me at 0% VAT but I have to report and pay 19% to the state. (b2b only)
Uh ? No. I don’t pay for VAT if I buy anything out of Belgium - because it would create a big administrative mess of pay back between member state.
Which is the stupidest system internally : get paid vat, paid it to the state minus the VAT you’re owned as business for whatever you’ve bought.
Loss of time and energy all around.
Between countries, yes. Domestically, you invoice businesses with VAT, hold on to the VAT money and quarterly deposit it to the tax authorities (minus the VAT for deductible expenses).
Businesses don't actually pay VAT, they just act as collectors for it. If the VAT balance for some business is negative, they actually get it returned by the tax authority.
Invoiced VAT, zero VAT, reverse charges in B2B are just an implementation detail that doesn't affect bottom line.
It is erroneous to call a tax break a subsidy. They are not getting any money from the government, they are simply paying less to the government.
> a problem of small inefficient businesses
Would it be better for these people to be unemployed? Or that the money they would have put into their business instead goes into VAT payments to the government, where there of course is no kind of inefficiency?
The questions of efficiency and competitiveness are frankly only the business of the person with the business, not something for other people to stick their nose in – unless you have a better job offer for them.
>It is erroneous to call a tax break a subsidy. They are not getting any money from the government, they are simply paying less to the government.
The result (more money for the business/individual, less money for the government) is pretty similar, right?
The WTO definition of subsidies [1], for example, explicitly includes the kind of subsidy in which "government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)"
In a very narrow perspective, you can say that the result is the same. And yes, in general many people call tax breaks subsidies like you point out. But there's a huge difference.
Example one: You give a man a fish. That to me is a gift or subsidy.
Example two: You force every fisherman to give you a fish each when they come back from sea. One slips through and you don't get a fish from him. Was that a subsidy? Was that a gift from you to him, since the net result is the same? Pardon the pun.
It's not a tax break! Small businesses did not pay VAT, and they STILL could effectively attach some cash from the government to their bills. (To be cashed in by their customers as VAT reduction).
Isn't that a tax break for the client of the small businesses? A VAT reduction is not something they "cash in", it is something they use to pay less in taxes.
Under the new Japanese system, if you're a small business but register to the tax office to get a number, you become taxable.
If instead you do nothing and don't register, you keep being exempt of taxation, except big clients will ask you for a registration number to get their rebates on their side, so you might lose them to other businesses that registered.
Yeah, it's pretty much the same everywhere I did the research (Estonia, Russia, Belarus).
What you could do is offer a discount to the business the minute they ask for a VAT receipt. (Of course, you bake the VAT amount in right from the start.)
Alternatively, you could explain that you aren't paying VAT because you want to keep prices low – I've seen a couple design studios use this argument successfully many times.
I'm not versed in corporate taxes, but you're probably referring to a flat rate rebate on the client's taxes in case they don't bother declaring and proving all their expenses.
The new system opens more doors for deduction, but they can still continue the way they did before. And flat rate deductions have always been accepted to cover cases where there was few or no expense in the first place, it's not an unintended effect nor a surprise, and it makes everyone's life easier overall.
Edit: BTW in the new system there's still additional flat rate mechanisms at different levels. They really love it at the tax office.
as good and fair as any bigger and more powerful forces coming at you and demanding a cut of whatever it is you do... lest you're breaking the law
but this is very normalized, but ultimately is a legacy of imperialism and other kinds of centralizing powers: give your rulers some freebies or get harassed until you do
an alternative perspective is that we all need to contribute some money (and/or energy) to the public systems which do things for "all of us" as the public at large
when this is 'mandatory', like it is now (you can always not do it, but there will be consequences), we call it taxes and fees, to do this voluntarily is the now obsolete tithe (even the quantity matches 10%).
the real problem I have with this setup is that money (but I actually mean currency) is made up and controlled by governments in collab with banking corporations; which means they have ways to use this system to move some of said "energy" from us to them; this leads me to conclude that then, regular taxes like VAT are double dipping on our energy as we 1: get taxed so to give money to the government/public entities and institutions; and 2: they make up currency and extract money/energy from all of us automatically (them theories about how money is debt, combined with QE and the new quantitative tightening, are all parts of how this whole hidden system works);
arguably this way to take advantage of the currency/monetary system is only being used by private financiers (big banking) not governments which really do need the taxes to function at least for now but I already ranted too much
Can I challenge your view a bit? Yes, the rulers are double-dipping and even quadruple-dipping. But if you think about it, why are taxes so incredibly complicated, like there is not a single thing you can do that isn't taxed?
That is because taxation is not the main act, it is only the supportive act. The main act is creating currency from nothing. That is how the rulers get their wealth and finance their government. If you're paying taxes through your nose and think I'm being ridiculous by saying it's only a supportive act, think about this: Why is it so important that you and everybody else pay taxes to the government on your income and everything else, when the government can just print as much money as they need?
It is because the money would be worthless without the complicated taxation system. The money origins from the government (it says as much on the bills, even has a signature), and the only way to make anybody actually want that money is to force them to pay it to the government. So that's why there's so many and unavoidable taxes. If you work for a living you have to pay taxes in the government money - so naturally you'll want your wages in government money. If you make business, it's the same thing. And so on.
Taxes is the only way that the government can create demand for their worthless money, so that's why you have them.
I don't really see how what you say is a challenge of my views because I don't disagree with what you're saying
if anything I'll admit that it took me way to long to really grasp how taxes "close the circuit" of the money cycle (or as you say: "Taxes is the only way that the government can create demand for their worthless money, so that's why you have them.")
But I'm considering some additional (very empirical/pragmatic things): the multiple-fold dipping of "energy" is why it's all fractional reserve banking systems (fractions, or quotients, or rational numbers up until Euler's constant and financial calculi... but I say this to tell about the depth at which I'm trying to think about this)
I suppose my larger point is that given that the main act of creation from nothing ("financial alchemy"?) should suffice for well run states (i.e. governments but I can talk still more precisely about this) to get all their energetic needs (i.e. monetary i.e.cash and currencies) but because complex reasons (but mostly due to corruption in various forms?) it doesn't work and taxes are needed
The logic is that fiat money continually loses value due to inflation, which means that most people want to avoid it if they had the option. The stability that the central bank guarantees is that the currency will continue decrease in value, until it becomes exponential and out of control. Then a currency reform is conducted. The central banks do not try to hide that their goal is inflation, although they aren't very honest about the rate of inflation.
I'd say there would be no demand at all for government fiat currency, unless they forced people to use it. In ancient Rome the emperor just diluted the silver coins with other metals and tried to force people to accept it at face value. Then in much of history there was no fiat money to speak of, rulers demanded their tributes in gold or hard goods. But if you demand tributes (taxes) in a currency that only you emit, there will be a demand on that currency.
In the real world, we see this in many countries in the world, where as the government does not tightly control the population and their tax payments, they are not able to protect the value of their currency, and their people will use foreign fiat currency as much as they can.
I presume you like roads, social security, a standing army, and a million other things. These things cost money and the logical way to raise that money is via taxes. Please don't post unreadable incomprehensible stream of consciousness here. Take a moment to refine the words running through your head into a coherent paragraph or two.
Go look at America's budget and come back with that ignorance... The amount of money America spends on itself, its people, and its infrastructure, is embarrassing.
Taxes are often lauded as a necessary evil, but it's generally not JUST the tax people have trouble with. It's how it's allocated. And we can cutely sidestep or handwave that as "a voting problem", but it's interconnected.
I'd have no problem paying taxes to an entity who I could trust and know has my back, who invests in the infrastructure that makes life in this country better.
But we cannot trust that entity, it never does what it says it should on paper. It sends money overseas for pet military projects. It doles out countless frivolous contracts to fulfill the gargantuan military budget.
Collective pooling of resources only works when the spending of those resources is done for the benefit of everyone contributing. That currently does not happen.
I like creature comforts like anyone else, but I'd rather live in a country that gives a shit about me and puts my tax dollars to good use, instead of feeling like livestock in a rat wheel whose contributions to the country will never bear into a tangible benefit.
Then let’s fight corruption, let’s fight to spend those budgets on educating our populace and having amazing public services. Let’s stop dithering about taxes and create a system of government that punishes corruption and is policed by a wholly different institution. It’s ridiculous to expect any institution that polices itself to not fall into corruption over time.
The only way to fight corruption is to have a small enough government that it can be a) understood b) watched, and c) isn't too powerful. Much like the systems many on HN work with, if you can't keep a good chunk in your head at once and understand what it might be doing on the border with the bit you can't, then it's probably too big or you start having to give trust to others to understand it and handle it for you. If we want voters to be able to watch and meaningfully impact the government then it must be much, much smaller than any current developed nation's government is.
It has to scale to the population and functions that it serves. I’m not saying the current form(s) of government are doing it right or that they should be as big as they are. I don’t appreciate the simplistic rallying cry of “small government” that I hear all too often as if it’s some panacea. The average person can barely remember longer than a 7 digit number. I don’t expect everybody to understand every part of government at once. Understanding the larger bodies and functions of the branches of government sure. But understanding why the DOT has a purchasing agent, or why the local building department has electricians and structural engineers on staff, that’s beyond far too many people.
As you point out, that it needs to scale does not mean that it should be exponentially bigger than it was. In fact, economies of scale are supposed to be a thing in the commercial world but, for some reason, they can't occur in government…
There is no government small enough to for the average ignoramus to "watch" or understand in any meaningful way and our population and indeed people at large are absolutely shockingly stupid and informed about little beyond their hobbies and professions.
Look at for instance medicine. Medicine is vastly too complicated for average folks to "watch" or understand. We don't simplify medicine or appoint more ignorant boobs to decide what drugs are useful in between episodes of survivor we have a professional system which qualifies experts and helps us select individuals who actually know things to produce guidelines, useful decisions, and regulation.
There is no difference between that and civil engineering or astronomy. Government isn't merely another discipline it is the coordination of a multitude of disciplines which the electorate are equally incompetent at.
A government an idiot who can't follow complex plots on TV shows can understand its functionally incapable of delivering a useful product to allow one to run a 23T GDP country of 338M people and its not a useful goal.
If we take the bell curve as at least somewhat true then at least half of the population should not be cast as ignoramuses, at least in possibility.
Regardless, even if it were only the top 2% that could understand a small enough government in a meaningful way, that would be better than a government too large to be understood by no one in any meaningful way. It is not a black and white situation.
I also don't see why experts would be cast out from a smaller government. That, to me, seems like the product of more black and white thinking in pursuit of some fallacious nirvana that can only be used to dismiss the idea that a much smaller government might be better and possible.
Personally I wish more people would post stream of consciousness writing, as I believe it often reveals the uncertainty and inner conflict that exists within our thoughts and feelings.
What I gathered from what they posted was a conflict about realizing that governments need money but wishing they didn't force people to pay, but not sure if people would pay if it weren't forced, and trying to dance between those ideas.
Some may not like stream of consciousness and some may, it's hard to know, and it may depend on our current situation and format of the post or culture of the place.
Maybe HN has a culture to distill thoughts before posting, I dunno. I like more raw thoughts typically.
Nobody on earth who has spent any amount of time thinking about it thinks society at scale would pay for common goods if it was optional. Part of actually distilling your thoughts into a useful form is realizing when to use the backspace key.
There might be 1000 people reading this. We all have a stream of conscioisness. If we all shared it this thread would be unteadable with a few gems buried in dross.
Distilling your thoughts down and sharing what is worthy is a universal good not merely a cultural value. It's why we are reading this and not YouTube or Facebook comment threads.
At times what I deem as worthy is a distilled version. At other times what I deem as worthy is a messier version. Distilled can help me read it quickly and give me certainty over someone's perspective. Messier can take longer to read and yet show me an often more accurate window into someone's mind, helping me feel more connected to the person.
Again, if you're saying that you strongly believe HN is not the place for such windows into the inner workings of someone's mind and you believe HN should be the packaged output, I might agree. Most people who contribute here seem to obey that rule. Maybe if everyone posted stream of consciousness, this place would become untenable. However, if it goes from 1% to 3%, I think it'd still be manageable and then I could feel delighted at the interspersed nature of it.
In other words, almost the opposite of the free rider problem you may have alluded to regarding public goods, or the similarity to it if you think those who provide distilled versions are doing more work for the common good and the others are doing less. In this scenario, I suppose it depends on what one defines as good in the common good.
To be frank, this place is a slightly nerdier Reddit with stronger topicality enforced, whose audience trends toward middle age, male, and moderate. It is not a shining city on a hill. I can find a lot of the same content on Lobste.rs later in the day, and get comments from an actually exclusive group.
We're here because there is enough news to keep us visiting, and relaxed enough rules to feel comfortable challenging each other intellectually.
Most of the Internet used to be this way, before social media.
There's consumption tax of 10%. Freelancers basically were not collecting it up until now. Businesses didn't care.
Now, businesses can deduct the 10%, so it looks like they can reduce their bills by 10% _so long as freelancers actually collect the consumption tax_. (This wasn't in place before! consumption tax was consumption tax, not a VAT-style system)
Now in theory a freelancer can also deduct the 10% from their expenses. But many freelancers have very little in the term of business expenses (their computer, basically). So freelancers all have just taken an income hit (in a period where inflation is making a lot of basic food more expensive than ever).
The perfect storm of extra taxes, lower purchasing power to begin with, and more and more industries demanding people become "freelance" contractors rather than employees.
Very similar to the French system: if you are a sole operator under a certain revenue threshold you do not charge and cannot get rebates on TVA; if you are a sole operator with a standard company structure, you charge and get rebates for TVA.
Yes, that’s in fact another twist that wasn’t discussed above: the small business does not get rebates for TVA it pays itself.
That’s a disadvantage, if you’re then selling to a business customer, because then, the TVA DOES get paid twice.
But most small businesses are services businesses who do not have much purchases. And those who do can - at least in Germany- get a VAT ID and then write invoices with VAT.
Pardon the ignorance, but why is it a subsidy ? Wouldn't it be the opposite?
Large business remits to the government the money that they subtracted forVAT, for all sales, including tiny opcos. They then get the subtraction for VAT.
The subsidy is that the small business didn’t have to pay vat while still being able to attach a you-get-a-refund-from-the-government voucher to its invoices.
That is weird. The way it is supposed to work (in my country at least) is:
If a company is registered for VAT they will charge you X net price + Y amount of VAT for their items. If a buyer is also a VAT-registered company they subtract Y from the amount of VAT they owe (so it is a tax credit).
If you buy from a small company, not registered for VAT, you only pay X, because the seller is not subject to VAT, so they do not have to add it. So, you only pay X, and the fact that you can't subtract Y from the amount of VAT you owe is irrelevant.
So, the small companies have a competitive advantage of not having to add 20+% of VAT to their prices.
Small businesses having insufficient margins to pay taxes doesn't mean they are inefficient. It sometimes means they don't have enough leverage to get the margins other businesses can get.
The goal is to have the bigger company pay smaller companies less by the rate to keep costs the same but negotiations are weird.
My animator friend is very upset about this because she will lose 10% of her income. I'm not sure if the anger is directed into the right direction, but I agree that it is not really a good change. I'm not looking forward to the effort and to publish my adress either.
Inflation this year is absolutely brutal with some groceries almost twice as expensive.
As a freelancer I can invoice a client with consumption tax on the invoice, but not pay the consumption tax, yet the client can get the consumption tax he paid to me back. I wouldn't be suprised if criminals managed to get money from the government through fake invoices.
In Poland VAT fraud used to be absolutely huge a bit under a decade ago. After the government established really strict tracking of invoices and they started going after the VAT gangs the budget revenues literally doubled in the span of few years. I have mixed feelings about VAT here. We have one of the highest rates in Europe on most goods(23%), but running a VAT registered company I do get the VAT on purchases back. However, in the UK, where I used to have my VAT business before I could keep 60% of the VAT my customers paid me with no expenses! This scheme had different percentages for different kinds of businesses. In my case it was 13% of the net value could be kept if I remember correctly. It sure was sweet to bill a customer £10k, get £12k paid and only send £700 of VAT to the tax man without having any expenses! (the income tax is another story and it is actually way better in Poland than in UK, but that is beside the point).
So despite having run VAT registered businesses for over a decade in two EU countries I'm confused what is it that Japanese government is doing now and why. If anyone can explain it comparing it to VAT/sales tax in other countries that would be great
This sounds like abuse of animators by studios to save a lot of money. They should give them a contract or pay them more instead of people being angry they don't get that much in the beginning.
> As a freelancer I can invoice a client with consumption tax on the invoice, but not pay the consumption tax, yet the client can get the consumption tax he paid to me back.
And this is legal (not just in the sense that it’s technically allowed but also that you’re not technically required to file something at the end of the year and pay the difference [0])? Because you’re saying the government pays 10% of the purchase price in this scenario (crediting large businesses for 10% of the paid price, and that amount goes straight to you).
> I wouldn't be suprised if criminals managed to get money from the government through fake invoices.
If it really works that way, then there’s absolutely zero chance this wasn’t being milked for every ¥1!
[0] eg in the USA, residents of states that charge sales tax are legally not charged sales tax on purchases made in another state (with exceptions) but they’re technically required to track those purchases and pay the sales tax themselves at the end of the year. Enforcement is approximately zero, though.
> they’re technically required to track those purchases and pay the sales tax themselves at the end of the year. Enforcement is approximately zero, though.
Yes, legal as long as we're below a certain revenue (10million yen, I believe).
It's the filing of those records that the freelancers do not want to do.
> My animator friend is very upset about this because she will lose 10% of her income
She won't, if she increases her price with 10 pct as she should.
> As a freelancer I can invoice a client with consumption tax on the invoice, but not pay the consumption tax,
A government charges tax. Not you. If you put it on your invoice, without giving it to the government, and then the same government has to pay that same amount back to your client, clearly something's wrong ?
> I wouldn't be suprised if criminals managed to get money from the government through fake invoices.
What is the rationale* for VAT? I have never, ever understood this. If you are an individual, you pay income tax on your earnings. Why should you be taxed on your spending as well?
* 'We want to use the money for worthy purposes' isn't a rationale. A rationale is a reason people should pay.
It all seems rather geared towards funneling money upward instead of downward. Individuals pay taxes on gross income, while businesses only pay taxes on net profit. A poor person makes a big purchase in the form of a new computer or television and pays sales tax, while a rich person makes a big purchase in the form of stock, pays no taxes, and then when he sells it he only pays taxes if he sells it at a gain and if he sells it at a loss he gets to subtract the loss from his income for the year.
Fucking imagine if you bought a car and when you resold it you could subtract the depreciation from your income taxes. No wonder the French decided public decapitation was the only solution.
>A poor person makes a big purchase in the form of a new computer or television and pays sales tax
Because if you're buying it for personal use it's presumably for consumption, and if you're buying it for business use it's for business use. In the latter case you don't want to tax it because that would hurt businesses with low margins and give vertically integrated businesses an edge. There's definitely abuse of this with small businesses, where someone buys a pickup truck for "business use" but uses it for personal use, but that should be fixed with better enforcement of the tax code, not changing the tax regime entirely.
>while a rich person makes a big purchase in the form of stock
Because VAT/sales tax are consumption taxes, not a transaction tax. Stocks aren't consumed, so they aren't taxed.
>Fucking imagine if you bought a car and when you resold it you could subtract the depreciation from your income taxes.
So what are you advocating for? Abolition of all consumption taxes?
> Because if you're buying it for personal use it's presumably for consumption, and if you're buying it for business use it's for business use.
Most of the biggest expenses in people's lives - housing in cities, cars for commuting, food - are for the sake of maintaining their job, or just staying alive. In a fair world they'd be able to deduct those expenses just as much as businesses can. (This doesn't just apply to VAT).
>In a fair world they'd be able to deduct those expenses just as much as businesses can.
Okay but where do you draw the line between expense and consumption? Sure, you might need that BMW to "drive to work" but obviously a significant fraction of that car's purchase price isn't for "the sake of maintaining their job". Even a benchmark of "cheapest sedan you can buy" is tricky, because you can take public transit (depending on where you live), buy used, carpool, or bike. All of which get you to work but in a slightly worse way. Where do you draw the line between necessity and paying a premium for a better experience (ie. consumption)? Most tax regimes try to account for this, by incorporating a tax-free amount that's supposed to represent the amount need to maintain a basic lifestyle. Any amount above that is presumed to be above that's needed for a basic lifestyle and therefore "consumption".
> Sure, you might need that BMW to "drive to work" but obviously a significant fraction of that car's purchase price isn't for "the sake of maintaining their job". Even a benchmark of "cheapest sedan you can buy" is tricky, because you can take public transit (depending on where you live), buy used, carpool, or bike. All of which get you to work but in a slightly worse way. Where do you draw the line between necessity and paying a premium for a better experience (ie. consumption)?
The thing is, a company can buy or lease that BMW as the CEO's company car and the taxman won't bat an eye. It's the double standard that really bothers me.
>There's definitely abuse of this with small businesses, where someone buys a pickup truck for "business use" but uses it for personal use, but that should be fixed with better enforcement of the tax code, not changing the tax regime entirely.
Also contrary to what you think company cars are taxed in the us, unless a very specific set of conditions are met. Your example most certainty not count
It's not just small businesses, it's big businesses too. It's just normalised when they do it somehow. Rather than cracking down on small businesses for wanting the same privileges that big businesses get, I'd say we should apply the same rules to everyone; allow individuals to deduct work expenses under literally the same rules that businesses can.
Because if you're buying it for personal use it's presumably for consumption
So what? I already paid taxes on my income, now I need to pay additional taxes on what I consume...why? Kindly note here that I'm not arguing against the concept of paying taxes, but against the fact of being taxed on both income and outgoings.
No, it really isn't. The closest is the bit about Alexander Hamilton favoring consumption taxes because they're politically harder to raise than income taxes.
None of this articulates why I should pay tax on both earning and spending money.
"To the extent that taxing something results in less of it (whether income or consumption), taxing consumption instead of income should encourage both work and capital formation, which increases economic growth, while discouraging consumption.[3][4] Secondly, the tax base is larger because all consumption is taxed. "
"Many economists and tax experts favor consumption taxes over income taxes for economic growth.[26][27][28] "
But my question from the outset was about the rationale for taxing both income and consumption, which I stated plainly and repeatedly. You're pointing me at arguments for a situation that doesn't exist in the present.
Perhaps you're the one who should read more carefully.
>But my question from the outset was about the rationale for taxing both income and consumption
Diversification and/or anti-evasion? As per the wikipedia article consumption taxes are better because they favor investment rather than consumption, but it's pretty easy to evade by smuggling the money out of the country. This is very easy to do, especially if you need to transfer money of a country for a "business venture". Income taxes are also evadeable by taking money under the table. Taxing both basically makes it impossible to evade taxes.
> But my question from the outset was about the rationale for taxing both income and consumption
There is no such rationale: its a compromise between ideologically opposed forces with diametrically opposed goals for society, not a coherent policy with an integrated rationale.
> To the extent that taxing something results in less of it (whether income or consumption), taxing consumption instead of income should encourage both work and capital formation
That's...kinda silly on the "work" part as an economy-wide statement, and the way that it is true selectively about work and also true about capital formation is...well, there is a reason that people who make this argument are vague and handwavey about how it works.
Taxing things doesn't just magically reduce them in isolation, it reduces them by reducing the net marginal value realized from each marginal increment. But taxing consumption reduces the marginal value of work exactly the same as taxing income, because the marginal value isn't realized by getting a paycheck but by spending the paycheck on consumption; it discourages work, rather than encouraging it. At the same marginal rate, a consumption tax reduces the incentive for additional work just as much as income tax.
But, ät the same marginal rate" is key: VATs are essentially regressive, whereas modern income taxes tend to be progressive, sometimes fairly sharply so on "regular" income, counteracted slightly for the capitalist class by counting the kinds of income they have as eligible for favorable rates.
So, at any given overall revenue level, a VAT is going to have higher effective marginal rates for lower-income workers and lower effective marginal rates for higher-income workers than a politically palatable income tax, and that: that it reduces the incentive and reward for work for lower income workers while raising it for higher-income workers (whose work is also higher-return for the capitalists capturing most of the value produced by work) is what they are referring to when they say it encourages (some) work and favors capital formation. Its not that it coincidentally makes it harder for lower-end workers to get ahead by worker and pushes rewards up the scale both within the working class but also out of that class into the petit and haut bourgeois classes, but that is indeed the exact effect that those "economists and tax experts" are praising.
It's also not a coincidence that the "economists and tax experts" tend themselves to be high-income workers or petit bourgeois, as well.
> For the application of sales tax to all purchases including stock
So you want to make financial transactions more expensive and make the market less liquid? What good can come of this?
>and the abolition of capital gains tax.
What justification is there to tax someone buying $500 stocks and later selling it for $1000 the same as someone buying $1000 worth of stocks and selling it for $500? Taxing buying $500 worth of TVs makes sense, because it's presumably consumed, but it doesn't make sense for financial instruments.
>Why is that bad? Vertical integration allows the more efficient use of resources.
Companies already reap the savings from vertical integration. I'm not sure why the government should give them additional incentive to vertically integrate. Suppose the tax rate is 10% and we have two supply chains, one that's vertically integrated and the other that's not vertically integrated. Suppose further that both are equally efficient (which is plausible, given that nimble firms can outcomplete big conglomerates). Why should the government penalize the non-vertically integrated supply chain to the order of 10%?
People are less likely to be irrationally exuberant if there's an up-front cost to trading, no? Having to write a check (to to speak) to the government feels like real money, as opposed to the fantasy of sure-thing future profits that naive margin traders and property flippers may kid themselves into.
>People are less likely to be irrationally exuberant if there's an up-front cost to trading, no?
Stock bubbles promise to return your investment several-fold. See: stocks like Tesla or even Zoom (during the pandemic). A 10% tax isn't going to dissuade anyone from the prospect of making 500%. It will dissuade someone from buying broad-market ETFs or mutual funds that return on the order of 5-8% a year.
People already have trouble stashing away money in favor of immediate consumption. Forcing them to take a loss of 10% immediately upon investment basically makes saving much less attractive, especially if their future is uncertain. If for whatever they had to liquidate their investment they'd suffer a loss of 20% before any gains.
> What is the rationale* for VAT? I have never, ever understood this. If you are an individual, you pay income tax on your earnings. Why should you be taxed on your spending as well?
> 'We want to use the money for worthy purposes' isn't a rationale. A rationale is a reason people should pay.
I could equally say "You pay VAT on your spending. Why should you be taxed on your earnings as well?". Ultimately governments need taxes and take them where they can find them.
The benefit of VAT is that it's a tax that's harder to evade, because the rebate system means everyone is reporting on everyone else. A high VAT rate is also a way to do stealth protectionism without falling foul of the WTO rules - domestic producers can pay de facto higher salaries (because the VAT revenue allows you to reduce income tax) whereas the full VAT rate gets paid on foreign-produced goods.
The huge downside is that VAT is taking money from businesses regardless of whether profit is made or not. Cooperate Tax is fair; it is taxing on profits made. VAT, on the other hand, is not. We should not tax a transaction where a struggling customer is paying a struggling business.
> The huge downside is that VAT is taking money from businesses
Businesses don't pay VAT (yes they pay it, but its deducted so they get the money back. The only thing VAT can be accused of regarding businesses is that it's essentially a free loan to the govt)
That is a huge misunderstanding, and even business owners get fooled by that idea. It's one of the most pervasive myths in economics by now.
If you have a business that has more money coming in from sales than your expenses, then you are paying more (usually much more) in VAT than you are getting back.
If you are getting back the same as you pay in VAT, that means you are breaking even on the business side and should start worrying about bankruptcy.
What you are describing is not the core of VAT. It's auxilary scheme for supporting export.
And it's a hole in VAT which enables various fraud.
Without that loophole you should rais the prices for your foreign customers by x% but that could make you globally uncompetitive, hence the loophole.
VAT is not a tax on customer, it's a tax on added value that every (profiting) company along the production chain creates.
Ultimately customer pays it, because the customer pays for everything, both value added and all the costs from previous steps.
But it doesn't mean it's a tax on consumer. Because in absence of it companies could just keep their prices as high as they are (because why lower them if the customer already pays them) while keeping all that money.
> The huge downside is that VAT is taking money from businesses regardless of whether profit is made or not. Cooperate Tax is fair; it is taxing on profits made. VAT, on the other hand, is not. We should not tax a transaction where a struggling customer is paying a struggling business.
Why not? It seems like you're arguing for a tax break for struggling businesses, but those are the ones that most need to be subject to capitalism's creative destruction. If business A is making a lot of product and consuming a lot of resources, but that product is barely worth buying, and business B produces less but does so more efficiently, it seems to me that business B is more socially beneficial and it's better to tax business A.
There is no rational. The government will try to tax every way possible and as much as they can possibly squeeze out of every tax payer. It's just how governments work.
Of course it's a tax on spending, because consumers have to pay it when they buy things.
Just defining it as 'a tax on added value' is meaningless. Why should we wish to tax value, which is something we all seek? To be sure, businesses often just mark up the price of things, and we can in turn tax the profits of the business same as individuals are taxed upon their income.
Yes, it is a tax on spending done by normal people, but for VAT registered businesses it really is a value added tax. For example, let's say you buy a widget for $1000 + 20%vat = $1200, you record you spent $1000k of your money and you "earned" a $200 vat credit(you actually paid $1200, but the government "kinda owes you $200"). Then by the magic of your sales technique you sell the same widget for $2000(+20% vat). You get paid $2400. $400 of this is VAT, you take back your $200 and you pay the remaining $200 to the tax man at the end of the month/quarter. Therefore you really paid 20% on the value added ($1000). Your client, if not VAT registered paid 20% on the entire value.
I'm aware of this (although thanks for taking the time to make a succinct explanation).
Thing is, I am not operating a business; as a consumer I just see that I am being charged a significant premium on the money I spend (and a smaller but non-trivial one on the cost of VAT administration up and down the chain). It's not clear to me why 'value added' needs to be taxed in the first place, as opposed to business profits or dividends.
>It's not clear to me why 'value added' needs to be taxed in the first place, as opposed to business profits or dividends.
I don't have a firm opinion either way, but I noticed few things that work in favour of VAT in minds of lawmakers.
First, the budgetary income from VAT is huge(a lot more than all other taxes combined) . I remember when my country established VAT for the first time. The budget went from around 33bln a year before to 83bln 2 years after. Also such increase in income made even more money available as foreign loans. This makes me think 90% of infrastructure built in last 30 years would probably not happen without it(there was a lot built, a big chunk was financed with EU subsidies, but local funds of some 20%~50% were required and of course having VAT was a condition of EU's membership).
Second. Lawmakers see VAT as something companies can't scam so easily (despite there being huge frauds in many countries). For example with income tax there is always an option to inflate expenses to minimize profits on paper. With dividends, a business doesn't have to pay them, benefits can be given in many different ways each requiring it's own detailed water tight description in relevant laws. Special measures for R&D are granted, special tax zones for disadvantaged areas etc. . Vat is seen as complex, but tax on business income is IMO a lot more complex. Still most countries have both business income and company dividend taxes.
Finally. If it is true as it appears that consumers pay the bulk of vat. This tax can be used to shape consumption. For example here we have 0% vat rate on children clothes, 3% on some food items, 8% on building materials if you're building a home for yourself, but 23% for developers. Anything that gives more control to lawmakers will be seen as favorable.
So in summary, does VAT need to be in place? I don't know, but I can definitely see a lot of forces pushing to keep it in place for the above reasons.
Because as a society we found that a government is the (as of know) the best way to manage us. To fund this system we give power to government to levy taxes.
One of those taxes is a tax on the value a business add to good and services, another is on the product of your labour, etc.
Now, you are arguing on a different system where this tax is not to your liking. This is a political choice and up to you to vote and promote other sources of government revenue.
I'm not a fan of taxing consumption. It's hard to believe that Japan did not have this for a very long time and now we are at 10%.
It's especially questionable since older people consume less, but usually have more savings.
What's the rationale for income tax? It makes no more sense to tax income than spending. I agree it's unpleasant to be "double taxed" but until the policy makers start listening to the economists it'll continue.
Eh, you can, just not easily at point of sale. You can give credits/rebates (either to all in the form of a UBI, or targeted by income) to offset the amount people will pay in VAT, or you can have different rates for e.g. "essentials" vs luxuries. See https://www.oecd.org/tax/reassessing-the-regressivity-of-the... - lots of countries that have implemented VATs are able to make them somewhat progressive.
Wish we'd just bite the bullet and move towards a land value tax though.
I'm not sure about the present justification, but VAT is an alternative to sales tax, which has existed for a very long time, while Wikipedia says income tax as we know it started in 1798, so there may be an aspect of historical legacy.
Although both VAT and income tax require states with extensive administrative capacity so I guess if there was political will to do income tax only it could be done. Maybe it is the politics of progressive vs regressive taxation? Or just that doing income tax only would mean very high income tax and high tax evasion?
It's "value added tax". If you do some business activity that increased the value of something then that increase is taxed.
The benefit is that with long production chains involving multiple business entities you tax the places proportionally to how much they earn from that production chain.
It's like income tax, but harder to dodge because you can't easily hide the sale.
Minor inconvenience vs Mexico electronic invoice hell.
Our VAT is 16%, for everyone except a select group of small business, of a now discontinued tax regimen.
We must issue a dual cryptographic signed XML invoice (by the emitter and the tax authority) with individualized items with ID codes from a tax authority catalog of recognized products and services, that includes tampons (53131615) to warships (25111708) to radical ecological organizations (94131701).
Every invoice needs to be sent to the tax authority servers to get the second signature, without it the invoice is not valid. Without it is not possible to deduct to VAT payments, or (monthly) tax filling in general.
No internet, no invoice software, no computers, equals no invoice and no invoice is almost tax fraud. A fiscal invoice is only emitted when a customer asks for it, but businesses are obliged to emit a "general public invoice" with all the sales where customers don't ask for a fiscal invoice.
Try to vacation in Italy:
Consumers are obliged to get an invoice, businesses are obliged to provide one. Including cryptographic signatures (but without the big-list-of-article-numbers and centralized signatures craziness). The financial police are allowed to stop customers within a certain distance of a business and ask for the invoice for their purchase. If the customer cannot provide one, the customer and the business are fined heavily. That's why the business owner will get very angry with you when you (as a clueless tourist) immediately chuck the invoice in the bin, because why would you keep the invoice for a pack of gum...
This sounds just like the VAT rules in the UK. What I don’t understand is why a company buying the services of a freelancer who isn’t consumption tax registered would be an issue in Japan.
In the UK it’s very common to buy services from non-VAT registered businesses. You don’t claim the VAT back because no VAT was added to the invoice.
It sounds very similar to the GST (goods and services tax) wee have in Canada, which was introduced by Brian Mulroney in the 1980s.
Small operators are exempt from collecting GST. What that means is that if a small operator is your supplier, then when you purchase something from them, you don't have a GST receipt. Thus, you cannot claim the "input credit" on that purchase to recover any GST.
I'm not entirely understanding the situation in Japan from the article's description, but it sounds an awful lot as if the people exploiting the small-time suppliers (freelancers making less than 10M 円) must have been fraudulently claiming that they paid the tax to those small-time suppliers, and using that to claim offset credits to reduce how much of that same tax which they collected from their customers they remit to the government.
The freelancers will look 10% more expensive, because the corporations which exploit them can't use a loophole to hold on to tax dollars.
"Please sign my petition so that my employers, who won't give me a full time job but keep me around as a disposable contract worker, can keep stealing tax money, so that I look cheaper to them, and consequently have a job so I can continue to barely make ends meet."
> Historically, businesses with annual sales of under ¥10 million ($67,500) have been exempt from the consumption tax. This isn’t going away. Tax-exempt businesses technically can continue as they were.
> Small businesses that were previously tax-exempt may need to register or risk losing clients — but if they do register, they will have to pay an additional 10% in taxes.
Not sure what is going on. Either nothing changes and things are seriously misrepresented, either, more likely, a major tax evasion loophole is being closed off.
> they will have to pay an additional 10% in taxes.
Sounds more like large corporations can not deduct taxes any more that never were paid.
I have the feeling the government is closing a tax loophole for big corporations, and those now 1) try to push that cost towards their freelancers/suppliers and 2) in order to justify this practice, started a marketing campaign that the "poor freelancers" are being targeted by the government. Business as usual imho.
It seems there are two major talking point: one is that it’s simple 10% cost penalty for previously exempted small businesses, that isn’t necessarily easy to reflect on prices. Another is that the requisite bureaucratic processing is apparently cumbersome.
So “everyone” is trying to get registered, push 10% price hike, and prepare all the forms, all at once, and realizing that it’s a bit complicated to do right now, just now. And are complaining just now.
Big business sells stuff to consumers. They collect consumption tax from consumers. That consumption tax gets sent to the gov't. This is the same as its always been.
Big business buys stuff from other businesses. When buying things, they are paying 10% in consumption tax.
With this change, the consumption tax they pay to other businesses can be deducted from the consumption tax they send to the gov't from their sales to consumers (making consumption tax be a value added tax, and avoiding deeper value chains from being "consumption taxed" over and and over and over again).
In order to support this, invoices have extra details (notably a tax number), to avoid VAT fraud.
However, businesses also sometimes bought things from freelancers and the like, who mostly did not charge consumption tax. A freelancer with an existing business relation might send a 100k JPY invoice to a business, and the business pays it.
But with this change, the business might say "hey, you're supposed to charge consumption tax right?" And would pressure a freelancer to charge 100k JPY (tax inclusive), effectively reducing the amount the freelancer get (since the consumption tax would need to be sent), _but also reducing the cost to the business_ since the 10% of paid tax reduces the amount of collected tax sent to the government, and they only really are paying like 91k JPY.
Now really really, freelancers should be like "We are going to charge consumption tax so are increasing the tax inclusive amount by 10%. Please deduct things correctly" to businesses. B2B interactions are already basically marketed at tax exclusive rates. And hey, the business can deduct.
But freelancers are bad at negotiating, and "please pay me more" is an argument that many freelancers are bad at doing this. On the business side, many businesses use freelancers specifically for cynical reasons and are very comfortable pushing for freelancers to offer to take the tax hit.
I think it's important that in this model, the amount of consumption tax given to the gov't doesn't actually increase. The amount of consumption tax collected by the freelancer is deducted by the business from its collections. This is totally advantageous to "real businesses".
I don't want to comment too much on the ethical/moral nature of it, because I'm fortunate enough to be exempt from this stuff for "clients being abroad" reasons. But it's a bit of a mess.
EDIT: also, if you register into the tax system you gotta do a lot of paperwork. People not in the consumption tax system were basically just having to report their income on a single line, and paying income tax. There's a lot of good software to track this stuff, but taxes in Japan for a freelancer was basically easy enough to entirely do on paper by just adding up invoices and dividing, up until now.
I assume that a rate of 10% VAT is rather low in comparison internationally (e.g. EU is around 20 %).
Also for typical business customers it should be identical to purchase something for a net amount of x or for a net amount of x plus taxes. They can deduct the taxes anyway and the net amount is identical.
That is why usually you can display prices to business customers without VAT.
So as I understand it, it is a change, but not with any real business effects unless one of the parties had incorrect taxes before... Which would mean that this party before was subsidised by other taxpayers.
There's a funny Japanese movie about small business tax shenanigans, A Taxing Woman (1987). Several of Nobuko Miyamoto's movies take a humorous look at Japanese business. Perhaps the best of those is Supermarket Woman (1996).
The people voted for these taxes (or they voted for the people who voted for them).
Interestingly, however, increased govt revenue is not correlated with long-term increased economic output or GNP. (Of course, govt revenue will increase temporarily whenever taxes increase.) Most of the highest tax nations have mediocre national output.
Average wage in Estonia is way less than that (and I would imagine most of EU's average wage is less than that), at 21,420.78 USD, but we have 20% VAT.
> Small businesses that were previously tax-exempt may need to register or risk losing clients — but if they do register, they will have to pay an additional 10% in taxes.
I can understand, and in Switzerland you are tax-excempt if you are (each year) under 100k revenue. However, you won't be able to get the tax others have on their bill back then (input tax).
Besides that, taxes for revenue exist because a country (shall) provide value to you (like safety or administrative stuff, like debt collection). And this stuff must be paid too.
The common advice is to negotiate prices excl tax, and that advice has been there for quite a while. Even before the new invoice system you could have your revenue taxed if it exceeds a certain amount (10mil JPY) for a certain amount of years.
What is surprising to me is how low the business side skills of most freelancers are. E.g., they don’t have a grasp of double entry bookkeeping, despite doing the blue tax declaration (青色申告). And as soon as there is a complicated payable or receivable scenario, the simple data entry freee and the like provide breaks down.
In my opinion the general skill level is pretty low. To me it is no wonder that the tax agency organizes tax lawyer led study groups, we need more of that.
Again, no surprise that people freak out over this system, but it‘s been years in the making. And the fact that sole entrepreneurs have been able to “pocket in“ the VAT so to say has always felt like a massive ripoff to me. This is especially so because the tax burden is even higher for me as a corporation here.
Being from Germany, having proper rules for VAT deduction appears as the most normal thing to me.
Speaking as a Japanese-American who has some insight to what's going on: This is just Japanese resisting external demands to get with the times.
Sending out invoices and paying sales tax to the government as a business is just a part of conducting business in the rest of the world; most of the Japanese resisting this are doing so because they are annoyed at the extra workload keeping track of numbers (they don't know what an invoice even is) and because literally nobody likes paying taxes.
As for why the Japanese government is pursuing this, the simple answer is they need more taxes coming in to offset deficit spending.
It's also worth noting the big businesses aren't complaining, because they already handle invoices simply as a part of doing business anyway. In particular, any business with international customers need to handle invoices, regardless of size, because the rest of the world demands invoices.
I have no sympathy for Japanese folks who are against this, they need to get into the 20th century. If they're selling something they pay taxes on those sales.
> new tax regulation decades in the making will go into effect
In Poland new sweeping tax regulation was hammered in a year, introduced in autumn and went into force with the beginning of new year. It was of course full of errors and unanticipated effects and all tax advisors and accounting services companies were just winging it for the first year.
I thought one of the reasons many smaller creators were afraid of it was the publication of their personal information when they register and that leading to potential harassment or if what you are creating is socially spicy it could lead to unwanted attention.
We have the same system in Germany.
If you’re a small business, you don’t pay VAT for the invoices you wrote, and your business customers cannot deduct any VAT when they buy from you.
If you’re a big business, you pay vat and your biz customers deduct that vat again from their own vat payments.
It’s all good and fair, no?
I guess that before, the VAT-paying customers were subtracting 10% of their payments to small companies from their VAT payments, as if the small companies had already paid VAT?
That was effectively a Japan-specific subsidy of small businesses with a hard cutoff at 10k.
I suppose that’s why people are complaining: they would like to keep their subsidies.