What is VAT?
VAT is an abbreviation for value added tax. A value-additional tax, called in some jurisdictions as a sales tax, is an additional tax that is charged on the selling price of a product to the final customer. It is usually levied on the purchase date of the item, not on the purchase date of the transaction.
VAT is a great way for local governments to raise money. It can be used to raise money for schools, police stations, and hospitals. But unfortunately, there are VAT tax loopholes that allow food manufacturers and sellers to charge higher prices for imported goods, and thereby create shortages in local communities where local businesses rely on tourism revenue. In some areas of the country, food is imported for the sole purpose of raising production levels above the domestic demand and then re-sold for higher prices to make up for the difference between the actual cost of production and the local demand.
more purchases of goods and services
Some economists argue that raising the rate on food is the most efficient VAT strategy, because it creates a stronger incentive to purchase local products. For instance, higher food costs result in fewer people shopping in your community, and therefore, more of those people will shop at stores located nearby. More people will mean more purchases of goods and services, resulting in more income tax being levied. In this scenario, a lower rate on food is really a weaker incentive than one charging higher property and casualty taxes. And this makes sense, because the two forms of indirect taxes, direct and indirect, together account for about two-thirds of the total tax burden in the United Kingdom.
There is also an argument that VAT is actually a transfer of wealth from local governments to consumers. That is, because businesses are able to buy supplies in bulk, and pass on those costs to consumers, the end recipient of these increased prices is also likely to be affected adversely. This is because VAT is effectively a tax on purchases and increases the price of purchases. The end consumer pays for this increase in price by either using more of their income to purchase goods and services or by increasing the amount of time they have to pay taxes. In both cases, the local governments lose money, and the consumers eventually regain lost ground to businesses that have increased prices without allowing them to pass on the full increase to consumers. Ultimately, both consumers and local governments lose money when VAT is implemented.
A VAT system that raises revenues without increasing prices
There are also some who argue that the current system of VAT is designed to protect the domestic distribution of goods and discourage competition among retailers. These arguments are not entirely wrong, but they do not account for all of the revenue-raising advantages that VAT brings. A VAT system that raises revenues without increasing prices is something of an anomaly, and is something that has only recently been recognized as a beneficial strategy by European policy makers.
Overall, the argument for or against VAT continues to fester. There is little doubt that VAT creates additional costs for businesses and decreases consumer purchasing power. However, most of the advantages that are credited to VAT are positive: it reduces taxes on imports and it encourages consumers to use credit, rather than debit. These positive effects are not hard to recognize as the evidence behind the effects of VAT is readily available.