At first glance it seems any kind of consumption taxes should be very bad economically, discouraging both production and consumption, and since consumption represents a bigger part of spending for low-income households, it disproportionately affects people who should have more money. It almost seems like a worst tariff.
However it’s still a very common tax and I’ve never seen any economists argue it should be drastically reduced / eliminated altogether , and economically successful countries like the Scandinavians have high consumption taxes
Also I know sales tax is generally considered worse than VAT, but why ?
Posted by leafcutte
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So yes it discourages production, but that is true of the vast majority of taxes and is unavoidable if the government wants to raise significant money.
VAT is considered better than an income tax because it doesn’t distort savings. Income taxes can discourage saving by taxing gains from saving. There’s a misconception that VAT is better because it doesn’t tax work but that’s not really true – if you’re taxing the things you can buy with work that’s effectively the same as taxing work.
VAT isn’t regressive though, under most systems internationally it’s very slightly progressive because there are often exceptions or lower rates for “necessities’ built in. It is regressive if you look at just one period of time because people with temporarily lower income consume more. All income is eventually consumed though so will be taxed eventually.
https://www.oecd.org/en/publications/reassessing-the-regressivity-of-the-vat_b76ced82-en.html
VAT is usually considered to be better than a sales tax because it causes less distortions. VAT only applies to the value added elect of transactions, whereas a sales tax applies to the whole amount. This means when products can attract a sales tax at multiple points along the supply chain increasing the tax for some products. Usually you have exceptions to sales tax, eg no sales tax on business to business transactions, and this makes them work more like a VAT but at the cost of added complexity – you might as well just have a VAT.