Dinero, in the comments here:
"It occurs to me that VAT has a monopoly profit tax element to it. [In that it taxes the profit margin on a transaction rather than the profit of the balance sheet aggregate turnover]. I was thinking of the word monopoly in that where a vendor sells something unique and in demand, without competition then that vendor can successfully pursue a high profit margin.
Ignore the sentence in square brackets, which betray a deep misunderstanding of basic bookkeeping and economic concepts.
VAT does precisely the opposite! It doesn't tax the profit margin and helps the monopolist.
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Consider our monopolist, who is insulated from market forces (economies of scale, barriers to entry, patents etc). He pays his workers £50 per unit and sells them for £100 incl. VAT. The UK VAT is one-sixth of the selling price, so he pays £16.67 VAT and has a net profit of £33.33 per unit, or 33.33% of the selling price.
Our new entrant or challenger, subject to competition pays his workers £50 per unit and sells them for £70 incl. VAT. He pays £11.67 VAT and has a net profit of £8.33, just under 12% of turnover.
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If the unit selling price is squeezed by a £5 and costs go up by £5, the monopolist's profit per unit is still £20, or 21% of the selling price. The little guy still has to pay £10 VAT and ends up with a net loss of £5 per unit.
So the little guy goes out of business and his ex-workers are all looking for work. The monopolist survives and can push up the selling price to £100 again and push down wages to £50.
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In our first scenario, the two businesses had pre-tax profits of £70 and tax man collected £28.33 in VAT.
What's the position if the tax man scrapped VAT and imposed 40.5% corporation tax instead (£28.33 ÷ £70 gross profits)?
The monopolist pays £20.23 corporation tax on £50 gross profit (more than he paid in VAT) and the little guy pays £8.10 corporation tax on £20 gross profit (less than he paid in VAT). That's a good start.
If selling prices drop by £5 and wage costs go up by £5, the little guy's after tax profits fall to £5.95 per unit, so he still making a living. The monopolist is still doing very well. We end up with more new entrants and challengers; lower unit prices for consumers; more employment; and higher wages.
What's not to like?
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