THE SALES TAX

Evening Post, Volume CXXX, Issue 2, 2 July 1940, Page 8

THE SALES TAX

CREATED BY THE WAR

CONTINENTAL EXPERIENCE

WHERE IT IS BAD

Purchase, turnover, or sales taxes began their remarkable "career" at the end of the last war, says a writer in the "Manchester Guardian." They were a striking success in every country in which they were imposed, at least from the point of view of the Treasury. A sales tax is a very productive tax, easy to collect, so that it is not surprising that after its "temporary" imposition for "emergency" purposes it became the mainstay of indirect taxation in several countries. At the moment roughly one-fifth of the total tax revenue in Germany and in France is collected from a turnover tax. These fiscal merits do not offset its conspicuous economic defects. From the economic and social point of view it is a bad tax in every respect and one can hardly find a single argument in its favour. It enters into prices; its incidence is on the consumer, even if it is not levied in the retail stage. It is an anti-social tax, regressive in its effects and falling heavily on the poorer classes. The only argument in its favour— as most countries have discovered—is "national emergency." 1 remember the Budget speech of the Finance Minister of a small South-east European country in 1921. "Unfortunately we are not England," he said;' '*the relation between the State and the taxpayer in our country —especially after the shocks of the war—is such that we could not rely upon direct taxation at the moment. After the Napoleonic War there were no other fiscal possibilities than to stop the coaches in every village and levy tolls on them. Well, the communication system has developed a lot since, and I see no other way in our emergency than to impose a general toll, a general turnover tax." A POST-WAR EXPEDIENT. After the last war victors and vanquished alike, were confronted with unbalanced Budgets, steadily depreciating currencies, inflated note circulations, rising prices. They tried to get the necessary revenue through direct taxation (in several countries with badly timed and unsuccessful capital levies). After the breakdown of direct taxation they were seeking for an easily and speedily collectable revenue, which could keep pace with inflation, and discovered the turnover tax. It was imposed in Germany in 1919, in France in 1920 (replacing the somewhat similar taxes imposed in both countries during the war), in Czecho-Slovakia and Hungary in 1921, in Austria in 1923, in Poland in 1925. The tax spread rapidly over the world until by 1933 some thirty countries had enacted turnover taxes, including Canada, Australia, Belgium, and several States in the United States. The last country to adopt it was Switzerland. We find great variety in the definition of taxable transactions. The German law goes so far as to include the services of the liberal professions. Some exceptions are always allowed: these usually include certain essential foods, farmers' sales, exports, imported raw materials for export purposes, highly taxed goods, and Government enterprise. Special luxury goods are often levied with additional turnover taxes (at higher rates). AT VARIOUS STAGES. The tax may be imposed at various stages of production and marketing. In a tax upon sales in general, such as is in force in Germany, every stage of the turnover is levied, which leads to inequalities and heavy burdens but also to high revenue. A manufacturer's sales tax or a purchase tax, as proposed by the Chancellor of the Exchequer, on wholesale sales has many advantages. It evades the multiplied tax burden and makes allowances easier, but it brings in big revenue only if its rates are high. One variety of the manufacturer's sales tax has been, developed effectively in South-east Europe (notably Austria and Hungary), where the total tax rate varies according to the number of taxable processes. This form of the tax needs immense legislative preparation and was imposed in both countries only after long experience. The industrial products of Austria, for instance, were classified into four hundred groups for the application of the tax rates. It seems that the new British tax will be rather on the lines of the manufacturer's sale taxes in Australia, Canada, and Turkey, with arbitrary flat rates. France and Belgium have adopted a number of special flat rate producers' taxes in certain industries. Both countries (and also Italy) had unfortunate experience with sales taxes on retail purchases, which proved unproductive and costly. VARYING RATES. The rate of the tax varies within the limits of i per cent, to 5 per cent.; the median is somewhere between 2 per cent, and 3 per cent, at the moment. The rate is 2 per cent, in Germany and 'France, 2$ per cent, in Italy, 3 per cent, in Hungary. Supplementary luxury taxes are levied m addition with higher rates, ranging from 5 per cent, to 15 per cent. Many disadvantages became evident only with the change in the business cycle. Among these were the snowball effects, the raising of the prices of goods with inelastic demand, and the reduction of the consumption of goods with elastic demand. It fostered business integration by permitting multi-process concerns to pay smaller sales taxes than the single-process concerns. For the same reason independent business men became commission merchants. In respect of inflation Continental experiences were rather favourable. Though individual prices were affected, they did not involve considerable changes in the general price level. The repressive effects of the tax on production, private spending, and the level of employment are in wartime offset by the heavy Government spending. ONE STAGE LOW RATE. Looking at the British proposal in the light of Continental experience, one may guess that a purchase tax imposed only at one stage of manu- ■ facturing and marketing and at fairly low rates will be administratively fea- J sible. It will not be a disappointment ; to the Treasury in its productivity, ' though, with its necessarily low rates, \ it will not have such importance as ' the sales taxes in foreign countries. On the basis of foreign experience, it is very likely that it will be difficult ' to get rid of this regressive and bad tax pven after the war. Food is exempted, but clothing, and therefore 3 the textile' industries, will be much 1 affected by the new tax. It will lead 1 to price rises—even to some rise in i the cost of living—but, provided the rates are low, it may not greatly in- 1 crease the danger of inflation. As aj 1