Value added tax looks good on paper, but.

Press, 7 July 1982, Page 22

Value added tax looks good on paper, but.

By

PHILIP WORTHINGTON

Twice this year the Prime Minister. -Mr Muldoon, has been urged to introduce a value added tax (V.A.T.) into New Zealand's tax system. So far he has not indicated whether he has been persuaded to do so. The step cannot be taken overnight. About three years is the generally agreed minimum period for introduction of V.A.T. Because of this delay, the Budget this year would provide an ideal opportunity for Mr Muldoon to announce the Government's intention to phase in V.A.T. as part of the trend towards indirect taxation, if that is indeed his aim. The first group to advocate V.A.T. was the Task Force on Tax Reform (the McCaw Committee). The second group was Mr Muldoon’s own caucus economic committee. As a multi-stage tax on a broad tax base, V.A.T. has many advantages for revenue gatherers, not the least of which are the large amounts of revenue available and the limited scope for evasion.

Neverthless. y.A.T. does require a lot of administration, does require time to set up, and does impose administrative and acounting burdens on all businesses, big and small. These drawbacks played a large part in persuading an earlier tax advisory group, the Taxation Review. Committee (the Ross Committee), to reject V.A.T.- in its 1967 report as being unsuitable for New Zealand conditions.

A V.A.T. system is in place in many European economies, where it has been shown to require a great many government employees to administer it. In Ireland there is one tax gatherer for every 457 taxpayers; in Holland the ratio is one to 399; in France it is one to 173; and in Britain it is as high as one to 106. and evasion is still said to be widespread, limited scope for it or not.

The high numbers of staff are required to check all the invoicing and claims for credit of tax which follow the trail of goods from raw materials to the market place. The additional paperwork is what makes V.A.T. difficult to evade, but- not foolproof. The table shows a simplified example of the operation of V.A.T. at a rate of 10 per cent. At each step in the chain. 10 per cent is added to the selling price. The amount thus raised at each step is paid to the tax authorities, but each trader claims back from the authorities the amount of tax built into the price he paid for the goods and which has been paid already by those further down the chain.

In this way. the tax bears a direct relationship to the value added to the goods, or the mark-up on them, as they pass through each step. The same revenue could be gathered by simply applying a 10 per cent retail sales tax at the last stage in the chain only, but overseas experience has shown that the opportunity for evasion is bigger, and that the rate of tax is more limited.

Retail sales tax \ systems elsewhere are limited to a ceiling of about 10 per cent before the incentive for evasion takes a hand. The mechanism of V.A.T. has an element of self-enforcement and much higher rates of tax can be sustained.

In Britain the standard V.A.T. rate is 15 per cent and it raised more than $28,000 million last year. The standard rate in West Germany is 13 per cent, in Denmark it is 22 per cent, in Holland it is 18 per cent, and in Ireland it is 25 per cent.

France has a mixture of rates. The standard is 17.6 per cent, but there is a reduced rate of 7 per cent on some items and a maximum of 33.5 per cent on luxury goods. The introduction of V.A.T. in

New Zealand would broaden the tax base by about $10,500 million; a flat 10 per cent V.A.T. would bring in $lO5O million in tax. of which as much as $l5 million a year would be required to administer the svstem.

This cost of administration does not include the “hidden" cost that results from the added burden on businesses. Under V.A.T.. buinesses would need to be licensed — about 100,000 of them in all sectors of commerce.

Each of these businesses would be responsible for keeping track of the tax records of all goods passing through its hands. No estimate of the cost of this extra burden appears to exist.

The licensing system is another plug in evasion loopholes. Only licensed traders would be able to claim credit for tax already paid on. but built into the purchase price of. goods needed for further manufacture.

As a side-light, the introduction of V.A.T. would impose at least one additional cost on many businesses. V.A.T. requires collection and returns of tax at all points in production and distribution. Many cash registers in use in New Zealand at present do not have a tax key and, unless retailers were prepared to charge out tax-inclusive prices rather than showing tax separately, these would have to be adapted or replaced. The introduction of decimal currency in 1967 was the last occasion such a change took place, and 69,000 new cash registers were needed.' Introduction of V.A.T. might please bureacurats. but it would upset traders. The system is neutral to the extent that much spending is discretionary, and it is a tax on spending rather thap income. As a form of collecting revenue, it is a money-spinner. What will determine the Government’s attitude towards adopting V.A.T. will depend largely on whether the Government believes the system is acceptable to the electorate.

Price of cabinet to customer = $llO (includes $lO.OO \ A I l (1) I ( the goods were exported by die retailer lie would be eligible for a refund of sb..'>H Inch is the VAT element in the price charged to him by the wholesaler. (2) For simplicity, the example assumes that the sawmiller has no taxable inputs and that timber is the only taxable input of the furniture manufacturer.

An Example of a VAT Transaction 1 Charged Out .ess lax Already Paid ’ Net Pavment I o tax Authorities (a) Saw miller (cuts and dresses timber) Value added and selling price Plus 'J) percent tax $ 25.00 5 2 5») $ Total invoice price 27.30 To (b) Furniture manufacturer Purchase price (without \AI 1 i Value added 23.”” 50.01) Selling price Phis ID percent lax 75.0” 7.50 ’ jb ? :>i 1 “>OH Total invoice pi ice 82.3” To (c) \V hole.saler Pure base ptiee (without \AI 1 Value added 73 OU 10.00 Selling price Plus 10 percent lax B.nlH) (!.’>!» 8 j! 1 7 311 1 Illi Total inv < lice pri< e ”3 50 * To (d) Retailer Purchase pri<e (without VAT' Value added 8 TOO 15.00 Selling price Plus 11) perceni l.ix |(lli.I il l 111.(KI 1(1 UH 8 jll 1 VI Total invoice price 1 III.Illi 111 nil