Skip to main content
Head shot of Patanjali Sokaris

Patanjali Sokaris

Pondering the universe

Sales tax - The middle class con

Sales taxes -- variously known as VAT or GST -- provide governments with extra revenue. They have usually been imposed instead of the politically unpalatable action of raising personal taxes.

The personal tax system is generally geared to have lower effective tax rates for low income earners, and increase with increasing income. It is designed to provide some equality of opportunity, so that the high income earners subsidise the poor.

Appealing to our selfishness ^

However, if the rates become too high, personal taxes are seen as an impediment to financial self-improvement, so giving personal taxes a very bad name. With large numbers of people now seeking better financial improvment, they now carry political weight, and so are courted by political parties everywhere. This group is known as the middle class.

Compared to rich people, the middle class don't tend to see themselves as particularly well off, so respond to efforts that appear to relieve their financial burdons. So when political parties offer to forego increasing personal taxes, by imposing a flat-rate sales tax, they accept it.

Such sales taxes appear to offer them a good deal, as the sales tax rates are usually below the marginal personal tax rate they would be paying instead. The more disposable income they have, the more they can buy.

Sales taxes are a fixed tax rate, independent of personal income level. Since most goods are subject to sales tax, everyone one pays the same for them, so poorer people are paying more for the basic necessities, as a percentage of their income, countering the advantages they get from the personal tax system. Those that really benefit are the rich, who, less burdoned because of the lower personal tax rates, have a lot more to spend on luxury goods, futhering the divide between rich and poor.

So, while the middle class get enough benefit to appeal to their financial aspirations, the rich friends of politicians get indulged.

International commerce complexity ^

Now all this would be very cosy were it not for the problem of international commerce and the failure of goverments to effectively tax goods coming into a country. While they are now putting measures to try to impose sales taxes on imports, those trying to sell goods to another country are facing the same measures.

For large companies, the overhead of catering to complex international sales tax arrangements can be amortised over their total foreign sales, whereas smaller sellers are extremely disadvantaged. With most businesses being small, they then become extremely limited in their expansion opportunities compared to larger companies, further disavantaging them.

For a small company, the complexity of the multiple VAT rates in the European Union makes having a workable commercial website almost impossible. Instead, the only alternative is to use Amazon or one of the other multinational resellers that charge substantially larger fees than the payment gateways they would use in their own country.

So, in return for a notional tax cut, the middle class, many of who are the small retailers trying to reach internationally, lose income opportunities. Such is the short-sightedness of personal greed. Poor people lose out, the middle class effectively stays where they are, and the rich get richer, at the expense of everybody else.

Keeping it simple ^

Personal tax is a simple system, being essentially only between an individual and the government, with their employer being the collector for most. So usually only three entities are involved.

Conversely, sales taxes are a complex system, requiring multiple entities to reconcile transactions across the multiple entities with which they deal. Governments have to reconcile across all of them, and international transactions complicate it even more.

In the end, all tax effectively comes out of the pockets of individuals. Companies pass through their costs, so while many try to avoid tax, they are not really the ones paying it in the end. Us personal tax payers do!

So why don't we stop running multiple competing tax systems, face up to that we individuals cop the whole tax bill, and ease the burdon upon goverment and business. Just run personal tax, accept the social adjustments that it facilites, and stop allowing politicians to game the system in favour of their rich mates by appealing to our selfishness.

TS: art-a 3ID: 2017-10-10-00-00-00Now: 2020-07-06-08-01-39Powered by: Smallsite Design©Patanjali SokarisManage