You’d think an accountant would understand VAT

Thinking about the Sage of Ely’s Sustainable Cost Accounting. He insists that each and every part of the supply chain should be responsible for their own Scope 1, Scope 2 and Scope 3 emissions. Anyone having any of those three must be declared carbon bankrupt unless they’ve the capital to wipe those out.

Now think of the difference between VAT and sales tax. A sales tax is a tax on the selling price of whatever. There’s a problem with this. If it applies to every part of the chain then longer chains get charged more. It’s a strong incentive to have entirely vertically integrated companies. This is not known to be useful. Therefore a sales tax regime does not charge that tax upon the supply chain. Instead it’s a once only tax at the retail point of sale.

A VAT regime instead says that we’ll tax each part of the value add at each point along the chain. This implies being able to claim back against suppliers’ VAT and charging to customers. We now do not have that incentive to vertical integration because there is no tax difference dependent upon the number of transactions in the chain. Cool.

It’s also possible to charge more in VAT than it is in sales tax. Because that entire supply chain is now – somewhat – self-policing in order to be able to reclaim input VAT.

Of course, the value add at any specific point in the chain is the same as the Scope 2 emissions. This is the value add/emissions of this particular part in the chain. The value add/emissions of Scope 1 is embedded into the prices paid for supplies.

Think on it. “He” is my supplier, I am me, you are my customer. His Scope 1 and 2 emissions are my Scope 1. My Scope 2 and 3 emissions are his Scope 3. Your Scope 2 and 3 emissions are my Scope 3. My Scope 1 and 2 emissions are your Scope 1.

We are in the same place as we are with VAT and sales tax. We can have a sales tax, sure we can. But that then rests upon every transaction. And we’re double to triple counting at each transaction point because we are adding Scopes 1 through 3 each time. Think of supplying jet fuel (what I persist in calling avgas). Saudi Aramco pumps up the oil. Some refiner, BP, turns it into avgas, some airport fueler buys that and sells it to the airline, Ryanair uses it. We’ve now four sets of Scope 1 through 3 emissions, we’re counting and taxing them all. The logical end point is that Saudi Aramco owns Ryanair so that we’ve only the one set of transaction taxes on that set of Scope 1 to 3 emissions.

Or, of course, we do what we do with sales taxes and charge it only on the ticket of the consumer at the final retail point and we charge it the once.

Equally, we can adopt the VAT idea. Each pays VAT on the value add of each stage of the transaction. Or our carbon fee, or our carbon bankruptcy, on only Scope 2 emissions. Scope 1 is dealt with at the level of the supplier, Scope 3 the purchaser.

If we charge at each stage then it has to be as with VAT, only on Scope 2. If it’s to be as a sales, tax, as with Scope 3, then it has to be on the final retail point only.

Anyone who now says that avgas doesn’t pay VAT an be derided as an idiot – this is an analogy, of course. We can also dismiss as a drooling moron anyone who says that any such tax won’t be large enough to change behaviour like this. But if that’s true then what the hell use will it be anyway, the entire point is to try and change behaviour.

Sustainable Cost Accounting tries to adopt the sales tax approach and then apply it at every transaction stage. But sa any accountant should be able to grasp, there’s a reason why w don;t do that. Either it’s sales tax at the retail point or it’s a VAT only on Scope 2 emissions.

Or, of course, they’re the Sage of Ely.

11 thoughts on “You’d think an accountant would understand VAT”

  1. Which, Tim, neatly explains why VAT is a very, VERY, bad tax indeed as it taxes Value Added at every step of the chain – thereby meaning we get less of the very thing we want more of if we want to make ourselves richer.

    Oh, and because taxing things changes behaviour, as any fool knows (even The Sage), VAT has massive compliance costs for the authorities and business and is not ‘self-policing’ at all – because people seek to avoid paying it when getting the ‘thing’ they want, and businesses seek to get their product defined as outside the scope…. bankers, housebuilders and jaffa-cake makers I’m looking at you.

  2. VAT has massive compliance costs in the UK because you apply different rates.

    NZ VAT (same thing) is a very cheap tax to administer as everything is the same rate. No need to have to enter everything separately.

    GST is actually quite popular with businesses here because of the simplicity. They fear what might replace it.

  3. A pendant (this one) picks up on the very least relevant point in the above to comment:

    AVGAS never was jet fuel – it’s (nowadays used mostly as) light aeroplane fuel. In essence* that is, high octane, high lead, petrol.

    You are thinking of AVTUR (“TUR” for “turbine”), which for civvies is Jet-A.

    Now back to vague relevance, and/or discussions about Lions.

    *See what I did there, m’sieu?

  4. Somebody pointed the VAT comparison to him, and he agreed vigourously, until somebody else pointed out what he’d agreed to.

  5. The double counting point was put to Spud in some detail but he had his usual perfectly analysed response along the lines of:

    ‘No there isn’t, you are a neoliberal fascist troll and are banned’

  6. @CD

    Re differing rates – OK. I get that this simplifies it for business if you have one rate on everything. But that still doesn’t stop avoidance and fraud (missing trader etc) and it being a shit tax on the thing we want, economically, as a society – to get richer via adding value.

  7. Why is this taxing emissions? Emissions don’t cost anyone anything. Oh! Externalities. Made up numbers. So it’s another Pigou Tax. Then it’s meant to be complicated & unfathomable. It’s an excuse for government to raise revenue. All that’s really relevant is the amount of moolah can be raked into the Treasury without the taxpayers gathering to hang politicians.

  8. You are missing the point, Spud really wants to bankrupt all companies so that someone can become the state commissar for industry

  9. I think Diogenes has it

    The double counting is a feature, not an anomaly – when you look at Murphy, Dickie or Reed what they really want is the complete expropriation of all private wealth so the state can utilise it for the greater good. Why else would you author a book called ‘The Joy of Tax’? What kind of sane person finds any joy in taxes?

  10. @Rev.Spooner
    Beat me to it. Roughly, AvGas is petrol (old fashioned leaded), AvTur is diesel – and enough people know from experience that putting the wrong fuel in a car doesn’t produce good results.
    Also, AvGas is subject to VAT and other taxes, and that’s been “a bit of a complaint” for a long time. Elsewhere, it’s not subject to some of these taxes and that makes flight training cheaper abroad.

    AvTur (Jet-A1) is not taxed (not just VAT) by international convention. If it’s liable to tax, then it creates an incentive to fill up where it’s cheapest – and that creates an incentive (well more than already exists) to arrive at those cheap filling destinations “running on fumes”. Run out of diesel in a tour coach and it’s inconvenient but you don’t crash; run out of fuel in an aircraft and it’s rather more serious, though there have been some incredible feats of airmanship to turns some of these events into relatively uneventful landings where the passengers walked away unscathed and the plane was re-usable. Search for “Gimly Glider” for one example.

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