Dating back to the 18th century, the Chinese vase that a brother and sister found “in a dusty attic” sold for $69.5 million at a London auction. The NY Times called it a “treasure-in-the-attic” story. For us economists, it is a VAT story.
According to the OECD (Organization for Economic Cooperation and Development) the U.K.’s value-added tax rate is 17.5%. Typically, taxing “value added” means a tax is added to each stage of production. But, for this 16 inch, mostly yellow and sky-blue vase that was probably fired near Shanghai, the only value-added stage was the auction. With the VAT, the price of $69.5 million became $81.7 million. (I am not sure why the NY Times says that with the VAT and a 20% buyer’s premium, the final price was $85.9 million.)
You can see where this is going. Depending on where you are, because tax systems vary, so too do incentives. A VAT, as a consumption tax, is supposed to encourage saving. With the deficit commission proposing a vastly simplified tax system, we might see incentives change in the U.S.
The Economic Lesson
The OECD tells us that VAT revenue for close to 150 countries is approximately 20% of their total receipts. The United States is the exception. In the U.S., for FY 2009, the personal income tax generated 44% of all tax revenue while social insurance taxes accounted for 42%. Corporate income taxes were a distant third at 7%.