Revisited: "On the removal of VAT"

Day 480, 02:40 • Published in Norway Norway • by Evleos

In the light of recent consensus regarding the increase of VAT taxation, I believe it is fitting for me to repost an article I wrote on the subject some months ago. Back then, our newspapers were flooded with what I’d call “illegal imports”; people offering to sell goods by donating them, thus not selling them on the proper market. Furthermore, foreigners working in eNorway but fighting against us, e.g. in resistance wars, probably do not want to support the eNorwegian economy by buying eNorwegian goods, but rather import them by donations. Thus they avoid VAT taxation. However, if the income tax is our source of tax revenue, we will not have these kinds of problems.

The account Value Investment brought another argument to my attention; As a GM, by setting the price of a good close to zero and then buying up all the goods yourself, you avoid VAT taxation. You can then afterwards sell the goods to other people by donations, without VAT taxation. Knowing that profit margins for most GMs are thin, if there at all, i definitely see the incentive to do this. Adding up to 6% to your margins is welcome. This does of course put the righteous companies at a disadvantage, which is hardly fair. This is another problem we avoid by banishing VAT taxation.

It is my opinion that if we are to raise taxes, then raise the income tax. I do not see why we are to have VAT taxation at all. For example, the largest nation in eRepublik does not have VAT taxation.

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On the removal of VAT

Removing VAT will increase our competitiveness with the amount VAT removed.

One of the annoyances in eNorway today, is the proliferation of black market trading – people offering imports that avoid the legal tariffs. This surge in import causes a flight of gold, tax revenue and jobs, and has the potential to further our economic slowdown.

However, there is a simple way to help our odds, a simple way to increase our competitiveness in the face of the surge in “illegal” imports. You might have already guessed it; the removal of the Value Added Tax.

Before you think I am crazy, hear me out. I will outline two very simple cases that proves my point. Note that these are just cases, not necessarily representative of an actual situation, but they nevertheless prove my point.

Wage: 10
Domestic product price: 3.5
Black market product price: 3.5

Case 1:
10% Income Tax*
10% VAT

Our diligent worker is left with 9NOK after he has paid his direct taxes. He desires to buy “product”, and can buy it either domestically or from the black market. As the domestic product costs 3.85 after VAT, he will buy the product for 3.5 at the black market. Gold, jobs and tax revenue have thus left eNorway.

Case 2:
15% Income tax*
0% VAT

Our worker is now left with 8.5NOK after his direct taxes are paid. As both the domestic and black market product are priced alike, our worker would buy the domestic product, as it is less of a hassle. Consequence; No gold nor jobs have left our country, and no tax has been exempted. Another positive effect, is that despite having reduced the overall tax pressure, our tax income went up. There is thus no way to avoid taxation, and the overall tax level may be decreased.

As you can see, with respect to black market imports, our competitiveness is increased by the percentage VAT is decreased. This implies that we have a very simple way to increase our competitiveness with 8%. I hope we soon have a system in place, in which the workers that decide to support eNorwegian industry, does not have to pay more tax than those who does not.

*Note that income tax levels are really irrelevant for my point.

Evleos”