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The Economics of VAT Essay (Article)

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Updated: Mar 31st, 2019

Summary of the article

The article is mainly based on the issue of Value Added Tax normally shortened as VAT. As defined in the article, VAT is a type of consumption tax, which is normally, imposed goods produced in a given country. The article begins with explaining the impact of high rates of VAT on the people of a country, especially the middle class.

Additionally, it claims that no matter how high the government puts the VAT rate of produced goods, the amount collected is not enough to cater for all its expenses. This is to mean that high VAT rates are not a solution to the needs of a government, unlike what most politicians claim. Actually, this is because when the VAT rates are high, the high-income people in the society will normally look for alternatives of lowering their expenses with regard to the high VAT.

On the other hand, the middle class avoid the high taxed commodities and in the long run the government generates revenues lower than it expected. It is because of this fact that the United States Senate voted against the increment of the VAT rates on its commodities. The resolution states that the high VAT rates on commodities will be a barrier towards its economic recovery. In fact, a poll conducted on the American citizens showed that about 60 per cent of America’s population opposes the VAT.

The article has also indicated that different rates of VAT rate charged per country with the rate in Europe going as high as 20 per cent while the United States of America charges a rate of 10 per cent. Other nations have VAT exemptions on commodities such as foodstuffs and medicines among other essential commodities.

The article concludes that the best way of solving the VAT problems especially among the Americans would be to increase the income tax instead of having high VAT rates. This is because while VAT rates normally affect each group in the society especially the lower and middle earners, the income taxes normally affect the high-income earners only.

The article’s relation to economics

VAT has been a topic of discussion in most nations including the United States of America and Europe. This is because the rate of VAT charged on the goods and services produced within a given nation will have a significant impact on the trend of the economy of the same country.

It should be noted that VAT is an important aspect of any nation’s economy as it is one of the main sources of revenue to a government. As depicted in the article, most of the political and government officials normally strive towards having high VAT rates so that they can in the end generate high revenues.

However, looking at this situation from an economic point of view, it can be noted that high VAT rates will be burdened on the consumers, affecting the middle class population. Keeping in mind that most of the nations’ populations are normally characterized by high percentage of people in the middle class, then this means that in case the middle class cannot afford the high VAT rated commodities, they will opt for other alternatives.

In this case, the sales of the country will go down hence the revenue generated. As such, the government will generate low revenues as opposed to their expectations in having the high VAT rated commodities.

It is therefore important that governments and other stakeholders involved in VAT regulation impose VAT rates that are fair to every person in the population. As a matter of fact, governments should look for alternative ways of accumulating increased revenues but at the same time not exploiting its citizens through high taxation rates.

VAT – advantages & disadvantages

The imposition of VAT by the governments of most has both positive and negative implications on the people and the government. As mentioned earlier in the paper, VAT is one of the revenue sources of any government. Therefore, it helps the government have funds to carry out the various operations in its obligations such as developmental issues and many more.

Secondly, VAT can be effectively used to reduce cases of tax evasion within a country since the tax is normally inclusive in the final price charged on a commodity. This is contrary to other types of taxes, which the taxpayers can easily evade because of their nature. As such, VAT has revenue security since the government is always assured of certain revenue collection form VAT given the fact that there are no chances of tax evasion.

The main disadvantage of VAT is lack of progressive taxation that allows the high-income earners to pay for commodities at a different price from the middle and low income earners. The uniformity in VAT taxation is normally a burden to the less fortunate people in the society who pay prices similar to their high-earning counterparts.

Wealth – advantages & disadvantages

According to John Adams, he defines wealth as the ability that one has to command labor. As such, wealth is also an important aspect in the society since it used in social classification among other classifications. In terms of taxation, wealth is of great significance since the people with high income in the society are the highest revenue sources to the government based on income taxes.

Therefore, on the side of the government the wealthy have the advantage of increasing the revenue collected hence improving the GDP. On the other hand, the disadvantage of being wealthy on the people is because the more wealth they have the higher the amount of tax they have to pay to the government. As such, it is not strange to find people in the society wishing they were middle level earners other than being very wealthy due to the amount of tax they pay from their high incomes.

The solution to insatiable need for revenue

From the article, it is depicted that the government of the United States of America among other governments have the insatiable need for revenue. This need drives them to imposing high VAT rates on the consumer goods without looking at the impact this decision could have on the people and the economy.

From the taxation point of view, one of the many solutions to the insatiable need for revenue is having a standardized VAT rate that can accommodate all the social classes in the society and then increasing the income tax. This will help reduce cases of consumer exploitation especially those in the middle and lower classes.

Having seen from the article that the high income earners continually generate revenue in the form of capital gains, interests, dividends and stock options just too mention a few, they are less likely to feel the impact of high taxation since they accumulate a lot of revenue anyway.

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IvyPanda. (2019, March 31). The Economics of VAT. Retrieved from https://ivypanda.com/essays/the-economics-of-vat/

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"The Economics of VAT." IvyPanda, 31 Mar. 2019, ivypanda.com/essays/the-economics-of-vat/.

1. IvyPanda. "The Economics of VAT." March 31, 2019. https://ivypanda.com/essays/the-economics-of-vat/.


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IvyPanda. "The Economics of VAT." March 31, 2019. https://ivypanda.com/essays/the-economics-of-vat/.

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IvyPanda. 2019. "The Economics of VAT." March 31, 2019. https://ivypanda.com/essays/the-economics-of-vat/.

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IvyPanda. (2019) 'The Economics of VAT'. 31 March.

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