Monday, March 19, 2007

Administative, compliance and enforcement expenses

A general consumption tax is among taxpayer's least expensive taxes to comply with, (if the sales tax itself is not considered as part of the taxpayer’s compliance expense). They are also among the least expensive taxes for government to administrate. Sales tax of goods is also among the least expensive for goverment to enforce. It is much more expensive to enforce sales tax of services.

The "value added tax", (VAT) species of sales tax is particularly less expensive to enforce. VAT grants strong audit trails and provide sellers with fast and complete rebate for any sales tax they paid (in the course of their business). It does not compound the effect of the sales tax by imbeding the tax within the prices of goods or services. There’s little inducement for intermediate participants, (commercial purchasers) to request that the sales tax be evaded.

Government’s enforcement expenses for non-vat sales taxes upon sale of services would not be measurably less than for taxes of income derived from such transactions. Government’s expenses for VAT of services may or may not be less but not significantly less than their expenses for taxing the income derived from such transactions.

If a government were to tax only sale of goods (rather than sales of both goods and services), it would induce billing invoices to overvalue labor and undervalue materials. This in effect grants preference for maintaining, repairing or rebuilding what exists rather than producing from “scratch”. Of the greater significance, exempting services from sales tax would greatly reduce revenue or increase the tax rate. I’m opposed to exempting services from sales taxation.

Government must obtain similar data and perform similar tasks for taxing of services or incomes derived from their sale. If government taxes all sales and the income derived from the sales, the government accountants can and should share those attributable expenses between the two methods.

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