What is the consumption tax ?
Consumption tax is another name for Value Added Tax (VAT).
What's the advantage of the consumption tax ?
In many countries paid work is very expensive partly due to heavy taxation.
Investments in machines, ... are often supported by the state with subsidies or reduction of taxation.
This incites companies to increasingly use machines and reduce jobs for human beings.
If we wouldn't tax paid work but mainly consumption, paid work could become more competitive.
We could substantially simplify the complex taxation system if we would replace many complex taxes by a high consumption tax.
This would reduce administrative overhead for the state, companies and private persons.
It would become easier to avoid loopholes in taxation laws.
Consumption tax rate ?
In many countries about 50% of GDP are used for public spendings (infrastructure, education, social welfare, ...) and raised via multiple taxes.
If the consumption tax were the only tax, then the tax rate should be about 50% of selling price i.e. 100% of price without the tax.
The price without the tax would be much lower than in complex taxation systems because it would not already contain many indirect tax costs.
The price including taxes would remain +- the same. Instead of many taxes included in the price we would have a single tax.
Why is consumption tax linked to basic income ?
1. The consumption tax increases the effect of basic income reducing the price of work force
Those with basic income can work for very low wages and live decently.
This causes wages to decrease (at least when the employer offers jobs which are not only financially attractive).
If we tax consumption instead of wages then work force price will become even lower and increase this effect of basic income.
This is good for the economy (products and services will become competitive)
and for employees (employers offer attractive jobs and conditions to attract and retain workforce).
2. Basic income makes the consumption tax socially fair
Consumption tax rates are the same for all.
Basic income is needed to reduce the burden for those with low incomes.
If tax rate were 50% of price including the tax we would have the following situations depending on income added to unconditional basic income:
||Net taxation rate
|Lower than basic income||Negative. They get more from the state then they pay.|
|Higher than basic income||Positive. They pay more income tax than the amount of basic income.|
|Very high||Up to a maximum of nearly 50% of total income.|
3. Basic income reduces tax income on wages but not on consumption
With unconditional basic income (UBI) more people will work for lower wages or even unpaid in jobs or for purposes they really like.
Even if more people would work less hours it would be easy to produce enough goods and services because technology and improved motivation would increase productivity substantially.
As only a surplus to basic income will be paid the total amount of wages would be substantially reduced.
Tax income on wages would shrink dramatically.
With basic income people could continue to buy and pay consumption taxes.
Are there loopholes to avoid paying the consumption tax ?
If the tax rate is very high, it becomes interesting to exploit loopholes, even if this is complicated and expensive.
I buy everything abroad.
As already explained in the description of the consumption tax, the sales price is hardly changed by the consumption tax.
Many small taxes in the cost price are replaced by a high consumption tax. The sales price remains +- unchanged.
Various goods or services may be cheaper abroad. But it can also be the other way round.
The consumption tax does not significantly change the balance of cross-border trade.
If you want to buy a house, for example, you could halve the price if you did not have to pay the consumption tax.
This is relatively simple.
I set up a company which buys the house and gives it to me for free.
Companies pay VAT on the purchase of goods and services.
When they sell, they collect VAT on behalf of the state.
Periodically, they pay the difference to the tax administration. This corresponds to the tax on the added value created.
My company has paid a lot of VAT and collected none. The difference is negative and the company gets all the VAT back.
This allows it to pay back half of the loan. The house only cost me half. It belongs to my company and therefore to me.
Renovations and running costs are handled tax-free through the company using the same method.
The costs of setting up and managing the company are low compared to the profit made.
Solution 1 (obvious but not good)
Companies have to pay all the collected consumption tax to the state. So they can no longer deduct the tax they have paid.
This is unfortunately bad for small businesses. They buy a lot of production goods and services and pay a lot of consumption tax.
Huge enterprises can produce almost everything themselves (from the individual parts to the final product including various services) and buy very little. They pay little consumption tax.
Small companies would almost all disappear and it would be extremely difficult to start a new company.
Solution 2 (obvious but not good)
"Fictitious" companies are not allowed.
How do you define "fictitious" companies?
If necessary, my company sells some goods or services to be recognised as a "real" company.
If necessary, I pay an employee to clean the house or I pay the company a modest rent or ...
The competition between legislators and "fictitious" companies leads to complicated laws and a lot of bureaucracy. This will generally make setting up companies more difficult and increase the administrative burden to absurdity.
Only rich people will still benefit from the loophole.
Solution 3 (simple but effective)
The state does not pay a negative difference to the companies.
In the example, my company would not get the VAT back and I would have gained nothing.
Negative differences (shortly after founding a company or during seasonal or cyclical bad sales periods) could be credited to later business periods so that small businesses are not disadvantaged in the long run.