University Expansion Wasn’t A Good Idea – Michael Gove VAT And Sales Tax Edition

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It has to be said that the expansion of the universities wasn’t all that obviously a good idea. Sticking 50% of the age cohort through grievance studies for three years doesn’t particularly aid the future. But rather more than that we have evidence that there’re not sufficient people competent to teach to staff the upgraded places.

Let us take as our example this analysis of Michael Gove’s idea to scrap VAT and replace it with a sales tax:

Value added tax is an idea embraced by more than 150 countries around the world. The only major exception is the USA. China has one. The USA doesn’t have a VAT because sales taxes are local in the USA and they just can’t get their heads around how to make VAT work as a result.

Well, no, not really, they’d have to pass a constitutional amendment to have a Federal sales tax according to at least some lawyers. Just like they had to pass one to have an income tax. But yes, the US is the one major economy that doesn’t have a VAT.

Second, there is no guarantee of there being a tax reduction. A sales tax may be at a lower rate, say 5%, But it is charged right throughout the supply chain. Suppose goods change hands five times before reaching the end consumer. A 5% tax could actually increase end price by more than 27% in that case. Prices matching current VAT are likely. Reductions may well be few and far between. I am not saying there will be none: I am simply saying there will be big winners and losers.

Third, there is the massive bias in favour of imports to consider. Suppose something is made in the UK. By the time everything is assembled, through several layers of supply chain, sales tax of maybe 20% might be included in the price. An almost identical product can, though, be bought from Europe, where they would have VAT still. There would be no VAT charge for the European exporter of that product and they would have just 5% sales tax to pay in the UK. So their product would be substantially cheaper than the UK made equivalent. This tax would then massively undermine UK business and favour imports.

And, fourth, it would also bias against exporters. That’s because only the final exporter would not charge the sales tax. All the sales tax on the way through the production process would be a cost. UK exports would, then, be much higher than EU (and other country) equivalent domestically made products. So our exporters would not be able to compete because of Gove’s sales tax.

This is idiocy. Which is exactly the point we’re making about the expansion of the universities. There just don’t seem to be enough competent people to be teaching at them. For this comes from the Senior Lecturer in Economics at Islington Technical College. Clearly a place which should not have been upgraded to a university and thus being able to charge the thick end of £10 k a year for this sort of drivel.

Note the first point made. The US is the only place that does have sales tax – local but still – and does not have a VAT. The description of how a sales tax works is then entirely unlike the only example we’ve got of a sales tax.

For in the US business does not pay the sales tax. You get yourself an EIN – a Federal tax ID number. Then you show that number to anyone you buy anything from. And you don’t get charged the sales tax. It is only the people without the Federal tax ID, who are therefore not businesses, who are charged sales tax at the correct rate for their location.

Sales tax does not accumulate through the production chain. There is no impact upon either imports or exports. We do not have greater sales tax in total upon things which change hands more often through the production chain. Business to business transactions carry no sales tax. No, it’s not even reclaimed, it’s never charged or invoiced.

And that sort of ignorance is why the expansion of the universities was a bad idea. Simply because we can’t get the staff these days.

And yes, it does in fact get worse. Why do we have a VAT and not a sales tax? Why does everyone in fact, other than the Septics? Because you can charge the consumer a higher slice this way. If you had a pure sales tax, applied once and once only at the point of final sale, then you’d be giving a 20% – say, with the current VAT rate – incentive to transactions being done off the books, for cash. Guv’. That’s a pretty big incentive and lots of people would take it.

Which is the major criticism of the Fair Tax Plan in the US, which aims to replace the entire income tax system with just such a one off once only on the transaction chain sales tax. It won’t work because people will dodge it. In order to be able to impose a consumption tax at that sort of rate you’ve got to coopt the production chain into collecting it for you. Which is what the VAT does for you. Every part of the production chain wants to be able to claim back their input VAT. Thus they’re more likely – not certain but, more likely – to be charging output VAT and that’s how we reduce leakage from the tax system. Which is why for near two decades now I’ve been telling the Fair Tax people that they can only carry out their plan if they make it a VAT not a sales tax.

The entire distinguishing feature between sales tax and VAT systems is that a sales tax applies once and once only, at the final point of retail sale. The VAT applies to the entire production chain so that we can charge very much higher rates. A sales tax system – even the one mentioned that we can directly observe – does not operate in the manner the Senior Lecturer tells us it does. On the simple basis that the people who design tax systems are not idiots, unlike the …. ….. .

How about we shrink the university system back down to one that can be staffed by those actually competent to teach? Mebbe about half each of Oxford and Cambridge, a bit of Durham and what else?