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Comment by nostrademons | Hacker News Reader

VAT applies at a flat rate at all levels within the supply chain, sales tax is only collected from the consumer with the final sale. Under a 5% sales tax, the consumer pays $50 on a $1000 iPhone when they buy it at retail. Under a 5% VAT, Apple pays 5% of its profits (not revenue), then whoever makes the lithium-ion batteries pays 5% of its profits, then whoever mines the lithium pays 5% of its profits, and on down the value chain.

Among other economic effects, VATs do not incentivize vertical integration. With a traditional sales tax, corporations can avoid paying the tax by bringing all the suppliers in-house so that there's no transaction to tax. With a VAT, it's all the same: either you pay the tax or you pay the supplier and the supplier pays the tax.

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> Under a 5% VAT, Apple pays 5% of its profits (not revenue)

Apple pays 5% on the value it added, not on its profits on the phone.

If they buy $500 in components from upstream suppliers and sell the phone for $1000, they’ve added $500 of value (on which they’ll remit VAT), but not achieved $500 of profits on that phone. (They have labor and other overhead.)

That is not correct. VAT is added in the supply chain as a flat rate on price, then you keep an account of in-going and out-going. Then the state makes up the difference in the end of the fiscal year depending on if your customers were other businesses or consumers.

This is precisely to prevent your easily spotted mistake of promoting vertically integrated companies.

VAT doesn’t accumulate like that. If my business pays VAT on some goods it gets to claim that back at the end of the quarter. For most business it’s neutral (apart from the paperwork).

> For most business it’s neutral (apart from the paperwork).

Ehhh, I guess it is neutral if your expenses are the same as your revenue. That is no profit.

VAT is calculcated on 'the value you add'. What you owe is that amount minus the VAT paid on your expenses.

It's neutral up the chain, so if my supplier charges 20% vat then I charge 20% vat it doesn't result in the consumer paying 44% vat.

Companies don't pay VAT, it is a consumer-only tax. In countries having VAT, companies always treat VAT as an item-in-transit in their books.

In your Apple example, the consumer pays the $1000 plus the 5% VAT to Apple, and Apple sends the 5% VAT to the IRS. If Apple bought components for that phone that included VAT, the supplier providing the components sends that VAT to the IRS, and Apple can claim that VAT from the IRS.

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