economic organization and taxation

[gustavolacerda]

Attention Conservation Notice: ranting about a topic that I know very little about; accuracy is sacrificed for the sake of cute analogies.

Taxation happens when you have transactions between separate entities. For example, when you buy/sell something, or pay/receive money for services. It makes no difference whether the tax is charged to the

Comments

[easwaran]

I think some of this works quite differently under a Value Added Tax regime. I think the idea is that you tax an entity on the difference between the value of its outputs and the value of its inputs. Thus, if two entities merge, so that an intermediate transaction disappears, then the difference for the final process is just the sum of the differences in the two intervening steps. I don't know how this interacts with corporate income taxes - my understanding is that it is supposed to replace sales taxes.

I think the idea is supposed to be to find a way to get a source of revenue for the expenses that society (in the form of government) incurs, and to do so in a way that has the least distortionary impact on an idealized market system. (Obviously, you need to do all sorts of other regulation and taxation to internalize externalities and minimize the effect of irrationalities in human decision-making.) I have this mental metaphor of the market as a huge mechanism with lots of separate moving parts, and the tax as being a sort of friction that is imposed at every contact. Ideally you'd have the friction imposed proportionally at every contact so that you don't get distortions of any of the pieces, and "value-added" is supposed to be a way to measure what it should be proportional to.

[bhudson]

VAT doesn't particularly interact with corporate income taxes.

I'm pretty sure the way it works is you collect up all your coffee receipts for coffee you bought, and all the receipts from software you sold. Sum up the VAT you collected on sales, subtract the VAT you paid on purchases, fork over the difference. Buying a coffee shop therefore has no effect on your taxation.

Corporate income tax is much easier to game: you can hide a lot of the profits via accounting, setting up shell companies, etc. Mining companies in particular are experts at this game, so governments are moving to collect royalties on mineral sales rather than on profits.