> The U.S., for instance, has a 2.5 percent tariff on cars imported from Germany, while Germany has a ten percent tariff on American cars. In addition, Germany’s value-added tax is remitted on exports but charged on imports. As a result, while the logos of Mercedes-Benz, BMW, and Volkswagen are seen all over American roads, those of Ford and General Motors are a rare sight in Germany.
What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process.
The big difference in collections is that VAT is collected at each step of the chain of manufacture and distribution but refunded if the next step is not to a consumer, whereas in sales tax it is only collected on the final sale to a consumer.
As for why VAT is remitted on exports, it is the same reason why if GM builds a Tahoe in their factory in Arlington, Texas and sells it to a dealer or consumer that is not in Texas they do not pay Texas sales tax. Sales tax and VAT are both destination based. Exports, whether from Texas or Germany, are not to the final consumer and so VAT and sales tax are not owed.
Saying that VAT has anything to do with why BMW is more common than GM in Germany makes as much sense as saying that sales tax is why GM is more common than BMW in Texas.
> What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process.
To add some further context that helped me understand VAT:
Sales taxes are great, with minimal dead weight loss and distortion, but have the downside of encouraging black markets since it's easy to avoid reporting final sale transactions.
VATs are designed to be mathematically the same as sales taxes, but robust to black markets. The sales tax is captured on the manufacturing end, which is much harder to avoid reporting for a variety of reasons.
Sales taxes have the disadvantage of being regressive: the less prosperous spend a relatively larger proportion of their income on taxable goods. There are states that offer deductions from income tax for sales tax paid on food and perhaps other items, but as I recall it took a very disciplined filer to claim it.
Some states don't require tax collection at point of sale, so things like basic food or essential clothing are not charged sales tax. There's no need to apply for refund when computing personal income tax.
VAT only reduces consumption. Income tax also reduces investment.
For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country when the beverage leaves the store. So it's really a consumption tax.
No, there's no difference. Whether all prices rise by 25%, or all incomes fall by 20%, the system will reach exactly the same equilibrium. When a VAT is enacted, you can model this as everyone with an income paying the corresponding income tax. (For full accuracy, you'd also need everyone with monetary holdings to pay a one-time wealth tax, but you can safely ignore this because the amount of wealth is so small relative to the amount of income.)
The effect of the VAT is to make all money less valuable. This means that people will seek to earn less of it.
> For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country
VAT is paid on all transactions; that's the whole point of VAT. You're thinking of a sales tax that exempts business purchases. As soon as the tank is purchased, its seller must pay the appropriate VAT.
Yes, VAT is levied on the sale of the tank by it's manufacturer. But the distiller can claim back that VAT. This continues up the value chain except for the consumer who is not allowed the claim back VAT.
> Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax). Buyers who themselves add value and resell the product pay VAT on their own sales (output tax). The difference between output tax and input tax is the amount paid to the government (or refunded, in the case of a negative amount).
Though of course a distiller isn't reselling its still; it is the final consumer of the tank.
> [example of] 10% VAT:
> At each stage of production, the seller collects a tax and the buyer pays that tax. The buyer can then be reimbursed for paying the tax, but only by successfully selling the value-added product to the buyer at the next stage.
That reimbursement comes from the customer, not the taxing authority.
This link explains it better. And it proves my point: VAT on capital goods (in this case helmets) bought by VAT registered businesses are effectively refunded in full.
That link says... exactly the same thing as wikipedia, still directly contradicting you. There is a question mark here that I'll take up later.
But the example goes:
1. A vertically integrated helmet producer produces helmets out of nothing and sells a batch of them to a mine for a total price of €240. This producer has added "€200" of value, despite the sale price of €240, and owes VAT of €40 at a "20%" rate, which it pays out of the revenue from the sale of helmets.
2. The mine has purchased €240 euros of helmets and converts that purchase into €1200 of ore. This might look like adding €960 of value, but it isn't. It sells the ore for €1200, and since it has added "€800" of value, it owes VAT of €160, 20% of €800, which it pays out of the revenue from the sale of ore.
3. Because the ore sold for €1200, the government is owed "20%" of that, or €200, which it receives in one payment of €40 (when the helmets are sold) and another payment of €160 (when the ore is sold).
So far the terminology here is deeply stupid but logically coherent.
The question mark I mentioned before is what happens if the helmets fail to be consumed in the production of this batch of ore. Presumably they'll be reused to produce more ore. It would be odd if they still counted against the mine's "value added" for the second batch of ore.
I tend to suspect that the mine is considered to have added more value to the second batch of ore, but the page doesn't address the issue. This would mean that capital goods depreciate in full immediately.
Now, your original comment:
>> For example, if a distiller buys a tank, income tax is immediately paid. But VAT only generates revenue many years later for the country when the beverage leaves the store.
This is clearly false. Both of your links say it's false. The taxing authority receives revenue on exactly the same schedule that it would if the VAT were an income tax. Try running all the same transactions again with a VAT of zero and an income tax of 17%.
German car makers deduct VAT on machinery, equipment, factory supplies, and sometimes even utilities or specific components. Some US states offer car manufacturers tax exceptions on things like raw materials, but it is by no means apples to apples. When BMW builds a car in Germany, it enters the show floor free of embedded taxes on inputs. Thats not necessarily the case for US cars
Another important difference has to do with the size of the VAT tax compared to single-stage taxes. For example, in the US if you taxed 19% on inputs every step of the way, no one would be able to afford the final sticker price. Instead, the US taxes a much smaller amount but does not refund this like the VAT system, and the end consumer tax is the same small percentage. VAT can be much higher because it avoids the cascading tax effect. In the end maybe 19% tax was collected on the manufacture and sale in both the US and Germany, and all you changed was one having a higher tax versus cost but the sticker price evened out in the end.
Because of this difference in the two tax systems, VAT can be, and is, much higher than US state/local tax. But then, this means that differences in tariffs creates a compounding effect. A German manufacturer can sell to a US end consumer on average about: 100% cost + 2.5% tariff + 102.5% * (8.5% consumption tax) = 111% after tax cost. On the other hand, if Ford builds in the US and sells to a German end consumer, then the calculation goes: 100% cost + 10% tariff +110% * (19% VAT) = 131% after tax cost. So while Germany's VAT is 10.5% higher than the average US sales tax, and equal to the VAT any German would pay in Germany, its actually almost double that amount when you take into account the compounding affect of Germany's higher tariffs.
In short, the differences in the two tax systems result in systemically higher tax rates for VAT. And this means that EU car manufacturers do see a trade advantage in terms of selling to EU end consumers compared to US manufacturers selling to EU end consumers (when compared to either selling in the US) since the final after-tax cost calculation is multiplicative.
I'll try to summarize it for you. My first point was that with from the EU buyer's perspective, the German car can be delivered a bit cheaper because VAT is totally removed from it up until the end. The US car entering the EU market might have has sales tax embedded into the cost due to the differences in the tax systems.
To illustrate my second point, let's imagine both countries have a 10% tariff, and it takes $50,000 to build a car (ignoring point #1). In Germany, the German car's after tax cost is 50000*1.19=59500 and the US car's is 50000*1.1*1.19. The difference between the two cars in the German market is 5950.
In the US market, taking the average sales tax, the German car's after tax cost is 50000*1.1*1.085=59675 and the US built car is 54250, a difference of 5425. The difference between the cars is $525 tighter in the US market compared to the EU market. The German car makers get an advantage by virtue of how VAT is systemically higher and the resulting multiplicative effect, even when the tariffs are the same. When the EU tariffs are relatively higher, as they are now, the effect is even greater.
> VAT can be, and is, much higher than US state/local tax.
> And this means that EU car manufacturers do see a trade advantage in terms of selling to EU...
What is never mentioned in these discussions is that high VAT means higher prices as a whole and that has a chilling effect on consumer spending. German (and all other EU) manufacturers have a disadvantage of a smaller home market. This is then compounded by having other taxes on gas (+VAT too of course), which is much more expensive than in the US. So it's simply less affordable to have a car in the EU. And as a result, a high VAT and other taxes are not a competitive advantage for any local industry. This is different to tariffs or direct support, which are an advantage.
What does that part about VAT have to do with this? VAT is essentially a sales tax with a more involved collection process.
The big difference in collections is that VAT is collected at each step of the chain of manufacture and distribution but refunded if the next step is not to a consumer, whereas in sales tax it is only collected on the final sale to a consumer.
As for why VAT is remitted on exports, it is the same reason why if GM builds a Tahoe in their factory in Arlington, Texas and sells it to a dealer or consumer that is not in Texas they do not pay Texas sales tax. Sales tax and VAT are both destination based. Exports, whether from Texas or Germany, are not to the final consumer and so VAT and sales tax are not owed.
Saying that VAT has anything to do with why BMW is more common than GM in Germany makes as much sense as saying that sales tax is why GM is more common than BMW in Texas.