The general sales tax (IGV), however, affects both formal and informal activities. Although it appears to be a tax on gross income, it is actually a tax only on added value, which is why it is levied at each stage of production. At the second stage, for instance, one pays a tax on gross income but receives credit for the payments made at the first stage. This is a major handicap for informal suppliers of intermediate goods. The customer pays the gross tax but cannot obtain credit for the intermediate good purchased from the informal supplier. This places in informal supplier at a comparative disadvantage.
Indeed, and it also places an informal supplier at a comparative advantage if he is supplying finished, rather than intermediate, goods.
Which is really one of the problems with the Fair Tax idea, as it places all formal suppliers of final goods at a 30% price disadvantage to informal suppliers of same. That\’s the sort of price difference where even Farmer\’s Markets can compete with WalMart, isn\’t it?