Tuesday, January 29, 2019

Variable VAT Tax to Regulate Resource and Product Flow in an Economy

Variable VAT Tax to Regulate Resource and Product Flows in an Economy

So the title pretty much says it all. Let's get to a few details.

If the government imposes a sales tax on an item, not only do we expect an increase in tax revenue, but we also expect an increase in the price of the item.*  For almost all goods, (and here we will ignore any possible exceptions,) the quantity demanded will also decline. Because of this, a sales tax may be used to regulate the demand for, and therefore, although perhaps after some delay, the production of, a given product. By increasing the sales tax, both demand and production will be reduced. By reducing the tax, demand for and production of, a product will be increased, over the current quantity demanded.
Now, there is no particular reason why we should restrict ourselves to a positive tax, if for some reason,we wish to stimulate demand for a product beyond the present demand. We can impose a negative.sales tax on a particular product sold. The price to the buyer will go down, the quantity demanded will increase, and production will eventually rise to meet this subsidized demand.

And of course, there is no reason to restrict such a variable tax to finished goods or services. It can be imposed at any point in any market in any supply chain. Indeed, in countries with a VAT, the mechanism for such regulation and control of production is already in place.

With such a tax in place, resources can be directed to any place in an economy. In particular, resources can be directed to where they are most needed, say in response to some disaster, and not just to where the demand is greatest. Indeed, society's current practice of meeting any particular demand, that is, responding to some local surplus of money, may not always be in the best interests of the society, or its economy.
If, for instance, more infrastructure is needed, demand in that sector can be increased, while at the same time reducing the demand in other, more discretionary sectors,where resources may be being inefficiently used, or even wasted.

In the case of imports and exports, the same mechanism of variable taxation may be used. A goal, here, of course, might be to establish a balance between the value of imports and exports. Another might be to encourage an export of finished goods, and encourage an import of factors of production.
And of course, this system of allocation could be made completely transparent.
Naturally, there are many technical details which would have to be dealt with, most particularly how to deal with the relative differences in the elasticities of supply and demand for any given product or factor of production. However, I am confident that such difficulties can be worked out.

The main obstacles I see to the establishment of this, or indeed, any rational system of allocation of resources in an economy, to be political.
*Almost always.  The only possible exceptions would seem to involve a completely elastic supply base, with a high margin of profit above cost capable of completely absorbing the tax. The price may not change, as the profit would decline by the amount of the tax.

With totally elastic supply, however, the price is generally driven down to cost by competition, and the margin of profit is at or near zero.

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