A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase .
111-539: A value-added tax ( VAT or goods and services tax ( GST ), general consumption tax ( GCT )) is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared with, a sales tax . VAT is an indirect tax , because the consumer who ultimately bears the burden of the tax is not the entity that pays it. Specific goods and services are typically exempted in various jurisdictions. Products exported to other countries are typically exempted from
222-432: A demand curve , represents the amount of a certain good that buyers are willing and able to purchase at various prices, assuming all other determinants of demand are held constant, such as income, tastes and preferences, and the prices of substitute and complementary goods . Generally, consumers will buy an additional unit as long as the marginal value of the extra unit is more than the market price they pay. According to
333-526: A general equilibrium model which includes an entire economy. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium , efficiency and comparative statics . The stringency of the simplifying assumptions inherent in this approach makes the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real world economic phenomena. Partial equilibrium analysis examines
444-544: A 10 percent federal sales tax on indoor tanning services, effective July 1, 2010. Unlike previous federal excise taxes, this tax is collected directly from the consumer by the seller and based on the sale price rather than a quantity. However, the new tax is selective rather than general, applying only to a specific service. Canada uses a value-added federal Goods and Services Tax with a rate of 5 percent, effective since January 1, 2008. Alberta, Yukon, Northwest Territories, and Nunavut have no territorial sales taxes, so only
555-745: A HST may have a Provincial Sales Tax (PST), which are collected in British Columbia (7%), Manitoba (7%) and Saskatchewan (6%). Alberta and all three territories do not collect either a HST or PST. VAT was introduced in Chile in 1974 under Decreto Ley 825. From 1998 there was implemented a 18% tax. Since October 2003, the standard VAT rate has been 19%, applying to the majority of goods and some services. However certain items have been subjected to additional tax, for instance, alcoholic beverages (between 20.5= – 31.5% for fermented to distilled products), jewellery (15%), pyrotechnic items (50% or more for
666-502: A VAT Trustee if they: register and collect a Business Identification Number (BIN) from the NBR; submit VAT returns on time; offer VAT receipts; store all cash-memos; and use the VAT rebate system responsibly. VAT Mentors work in the VAT or Customs department and deal with trustees. The VAT rate is a flat 15%. VAT was introduced on 1 January 1997 and replaced 11 other taxes. The original rate of 15%
777-453: A better way of growing wheat so that the cost of growing a given quantity of wheat decreases. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S 1 outward, to S 2 —an increase in supply . This increase in supply causes the equilibrium price to decrease from P 1 to P 2 . The equilibrium quantity increases from Q 1 to Q 2 as consumers move along
888-503: A business below the margin of profitability. The effect can be seen when VAT is cut or abolished. Sweden reduced VAT on restaurant meals from 25% to 12.5%, creating 11,000 additional jobs. VAT offers distinctive opportunities for evasion and fraud, especially through abuse of the credit and refund mechanism. VAT overclaim fraud reached as high as 34% in Romania. Exports are generally zero-rated , creating opportunity for fraud. In Europe,
999-425: A change in the other variables constituting a shift between curves) or by a surface in a higher dimensional space. Generally speaking, an equilibrium is defined to be the price-quantity pair where the quantity demanded is equal to the quantity supplied. It is represented by the intersection of the demand and supply curves. The analysis of various equilibria is a fundamental aspect of microeconomics . A situation in
1110-518: A city must be able to import consumers to buy goods locally. If local sales taxes are too high, consumers will travel to other areas to purchase goods. In the United States, every state with a sales tax law has a use tax component in that law applying to purchases from out-of-state mail order, catalog and e-commerce vendors, a category also known as "remote sales". As e-commerce sales have grown in recent years, noncompliance with use tax has had
1221-572: A commission to study the possibility of internet taxation, but the commission did not make any formal recommendations. In a report issued in 2003, the Congressional Budget Office warned of the economic burden of a "multiplicity of tax systems, particularly for smaller firms". In an effort to reduce the burden of compliance with the tax laws of multiple jurisdictions, the Streamlined Sales Tax Project
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#17327653313281332-402: A country chooses to use monetary policy to fix its value regardless of the interest rate; in this case the money supply is totally inelastic. On the other hand, the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply; in this case the money supply curve is perfectly elastic. The demand for money intersects with
1443-448: A decade, it was imposed only on certain categories of goods and at differing rates. In 1994, VAT became universally imposed on production, wholesale, retain, and importation of all goods. In 2016, business tax was replaced with VAT nationwide. VAT's significance to China's tax revenues increased drastically after this. In 1993, a standard rate of 23% and a reduced rate of 5% for non-alcoholic beverages, sewerage, heat, and public transport
1554-470: A growing impact on state revenues. The Congressional Budget Office estimated that uncollected use taxes on remote sales in 2003 could be as high as $ 20.4 billion. Uncollected use tax on remote sales was projected to run as high as $ 54.8 billion for 2011. Enforcement of the tax on remote sales, however, is difficult. Unless the vendor has a physical location, or nexus , within a state, the vendor cannot be required to collect tax for that state. This limitation
1665-534: A large part of a consumer's income (e.g., staples such as the classic example of potatoes in Ireland), may see an increase in quantity demanded when the price rises. The reason the law of demand is violated for Giffen goods is that the rise in the price of the good has a strong income effect , sharply reducing the purchasing power of the consumer so that he switches away from luxury goods to the Giffen good, e.g., when
1776-408: A lower rate to products that are more likely to be consumed by the poor. Some countries compensate by implementing transfer payments targeted to the poor. The incidence of VAT may not fall entirely on consumers as traders tend to absorb VAT so as to maintain sales volumes. Conversely, not all cuts in VAT are passed on in lower prices. VAT consequently leads to a deadweight loss if cutting prices pushes
1887-399: A market when the price is such that the quantity demanded by consumers is correctly balanced by the quantity that firms wish to supply. In this situation, the market clears. Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves. Comparative statics of such a shift traces
1998-414: A reduced rate of 12%. Goods and services were redistributed among different tax rates. There was only one services that shifted from the standard rate to the reduced rate and that were non-regular land passenger bus services. These are not taxi services, which apply a VAT rate of 21%. Books and printed materials, including electronic books, were zero rated. Several services were moved from reduced rates to
2109-567: A sales tax could be mitigated, e.g., by excluding rent, or by exempting "necessary" items, such as food, clothing and medicines. Investopedia defines a regressive tax as "[a] tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder". Higher sales taxes have been shown to have many different effects on local economies. With higher taxes, more consumers are starting to reconsider where they shop, according to
2220-547: A sales tax. For example, sales tax in Chicago (Cook County) , IL is 10.25%, consisting of 6.25% state, 1.25% city, 1.75% county and 1% regional transportation authority. Chicago also has the Metropolitan Pier and Exposition Authority tax on food and beverage of 1% (which means eating out is taxed at 11.25%). For Baton Rouge , Louisiana , the tax is 9.45%, which is 4.45% state & 5% local. In Los Angeles it
2331-577: A study conducted in Minnesota and Wisconsin, where the sales tax was raised on cigarettes. Effects of higher sales tax were not shown immediately in sales, but about six months after the taxes were raised. High sales taxes can be used to relieve property taxes but only when property taxes are lowered subsequently. Studies that have shown this correlation were conducted in Georgia by cities raising sales tax and lowering property taxes. To combat sales loss,
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#17327653313282442-461: Is 9.5%, which is 7.25% state & 2.25% county. Sales and use taxes in California are made up of various state, county and city taxes. The state tax is "imposed upon all retailers" for the "privilege of selling tangible personal property at retail". Strictly speaking, only the retailer is responsible for the payment of the tax; when a retailer adds this tax to the purchase price, the consumer
2553-598: Is a VAT introduced in Australia in 2000. Revenue is redistributed to the states and territories via the Commonwealth Grants Commission process. This works as a program of horizontal fiscal equalisation . The rate is set at 10%, although many domestically consumed items are effectively zero-rated (GST-free) such as fresh food, education, health services, certain medical products, as well as government charges and fees that are effectively taxes. VAT
2664-519: Is a national sales tax introduced in 1991 at a rate of 7%, later reduced to 5%. A Harmonized Sales Tax (HST) that combines the GST and provincial sales tax, is collected in New Brunswick (15%), Newfoundland (15%), Nova Scotia (15%), Ontario (13%) and Prince Edward Island (15%), while British Columbia had a 12% HST until 2013. Quebec has a de facto 14.975% HST: it follows the same rules as
2775-445: Is an economic model of price determination in a market . It postulates that, holding all else equal , the unit price for a particular good or other traded item in a perfectly competitive market , will vary until it settles at the market-clearing price , where the quantity demanded equals the quantity supplied such that an economic equilibrium is achieved for price and quantity transacted. The concept of supply and demand forms
2886-402: Is difficult to enforce the taxes on electronic commerce especially for digital goods that trade across different countries. The effect that a sales tax has on consumer and producer behavior is rather large. The price elasticity of demand for online products is high, meaning that consumers are price sensitive and their demand will significantly change with small changes in price. This means that
2997-607: Is equal to the opportunity cost determined by the price, that is, the marginal utility of alternative consumption choices. The demand schedule is defined as the willingness and ability of a consumer to purchase a given product at a certain time. The demand curve is generally downward-sloping, but for some goods it is upward-sloping. Two such types of goods have been given definitions and names that are in common use: Veblen goods , goods which because of fashion or signalling are more attractive at higher prices, and Giffen goods , which, by virtue of being inferior goods that absorb
3108-400: Is input-output based. Producers are allowed to subtract VAT on their inputs from the VAT they charge on their outputs and report the difference. VAT is purchased quarterly. An exception occurs for taxpayers who state monthly payments. VAT is disbursed to the state's budget on the 20th day of the month after the tax period. The law took effect on January 1, 2022. The goods and services tax (GST)
3219-402: Is merely reimbursing the retailer by contractual agreement. When consumers purchase goods from out-of-state (in which case the seller owes no tax to California) the consumer is required to pay a "use tax" identical to the sales tax. Use tax is levied upon the "storage, use, or other consumption in this state of tangible personal property". Consumers are responsible for declaring these purchases in
3330-425: Is now one of the few countries to retain conventional sales taxes. Sales tax on online purchasers operates in a different manner. Generally, there are four types of electronic commerce: intermediaries, retail, business-to-business and media, all of which are affected by consumer response to sales tax. However, while consumers are technically supposed to pay a sales tax when it comes to cross state border transactions,
3441-421: Is related to a sales tax. See Comparison with sales tax for key differences. Conventional or retail sales tax is levied on the sale of a good to its final end-user and is charged every time that item is sold retail. Sales to businesses that later resell the goods are not charged the tax. A purchaser who is not an end-user is usually issued a " resale certificate " by the taxing authority and required to provide
Value-added tax - Misplaced Pages Continue
3552-553: Is that VAT is collected at the national level, while in countries such as India and the US, sales tax is collected at the point of sale by the local jurisdiction, leading them to prefer the latter method. The main disadvantage of VAT is the extra accounting required by those in the supply chain. However, payment of VAT is made simpler when the VAT system has few, if any, exemptions (such as with GST in New Zealand). 10% sales tax: So,
3663-479: Is the greatest contributing factor to the US current account deficit , and estimated this disadvantage to US producers and service providers to be $ 518 billion in 2008 alone. US politicians such as congressman Bill Pascrell , advocate either changing WTO rules relating to VAT or rebating VAT charged on US exporters. A business tax rebate for exports was proposed in the 2016 GOP tax reform policy paper. The assertion that this "border adjustment" would be compatible with
3774-404: Is the same as before the supply shift, reflecting the fact that the demand curve has not shifted. But due to the change (shift) in supply, the equilibrium quantity and price have changed. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept, the constant term of the supply equation. The supply curve shifts up and down
3885-462: The Civil War that they functioned collectively as a general sales tax. The first broad-based, general sales taxes in the United States were enacted by Kentucky and Mississippi in 1930, although Kentucky repealed its sales tax in 1936. The federal government's per-gallon tax of gasoline (beginning at one cent per gallon in 1932) and per-package tax of cigarettes ($ 1.01 per package since 2009) are
3996-552: The Organisation for Economic Co-operation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that sales taxes are one of the least harmful taxes for growth. Because the rate of a sales tax does not change based on a person's income or wealth, sales taxes are generally considered regressive . However, it has been suggested that any regressive effect of
4107-625: The United States . German industrialist Wilhelm von Siemens proposed the concept of a value-added tax in 1918 to replace the German turnover tax . However, the turnover tax was not replaced until 1968. The modern variation of VAT was first implemented by Maurice Lauré , joint director of the French tax authority, who implemented VAT on 10 April 1954 in France's Ivory Coast colony. Assessing
4218-474: The aggregate demand-aggregate supply model has been used to depict how the quantity of total output and the aggregate price level may be determined in equilibrium. A supply schedule, depicted graphically as a supply curve, is a table that shows the relationship between the price of a good and the quantity supplied by producers. Under the assumption of perfect competition , supply is determined by marginal cost : Firms will produce additional output as long as
4329-402: The law of demand , the demand curve is always downward-sloping, meaning that as the price decreases, consumers will buy more of the good. Mathematically, a demand curve is represented by a demand function, giving the quantity demanded as a function of its price and as many other variables as desired to better explain quantity demanded. The two most common specifications are linear demand, e.g.,
4440-401: The x -axis and demand on the y -axis, because price is the independent variable and demand is the variable that is dependent upon price. Just as the supply curve parallels the marginal cost curve, the demand curve parallels marginal utility , measured in dollars. Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption
4551-601: The 1730s. In 1755, Francis Hutcheson , in his A System of Moral Philosophy , furthered development toward the phrase by stipulating that, "the prices of goods depend on these two jointly, the Demand... and the Difficulty of acquiring." It was not until 1767 that the phrase "supply and demand" was first used by Scottish writer James Denham-Steuart in his Inquiry into the Principles of Political Economy. He originated
Value-added tax - Misplaced Pages Continue
4662-497: The 1992 Quill v. North Dakota decision determined that only the U.S. Congress has the authority to enact interstate taxes. Electronic commerce business can also be affected by consumption taxes. It can be separated into four categories: retail, intermediaries, business-to-business and media (Goldfarb 2008). These categories were affected varying degrees. The intermediaries were affected by the retail sales tax since it provides platforms for transitions between different parties (such as
4773-487: The Amazon marketplace). Business-to-Business transactions will be placed in different circumstances by whether the case will be taxed in the US. Electronic commerce goods are usually not taxed the same especially across the stats in the US. Different states have their own sales tax regulations, for example, some states use their standard sales taxes law for the digital goods, and some of the states have specific laws for them. It
4884-607: The EEC, following which, other member states (initially Belgium, Italy, Luxembourg, the Netherlands and West Germany) introduced VAT. As of 2020, more than 160 countries collect VAT. VAT can be accounts-based or invoice-based. All VAT-collecting countries except Japan use the invoice method. Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax). Buyers who themselves add value and resell
4995-527: The GST is collected. Other provinces have either a Provincial Sales Tax (PST) or the Harmonized Sales Tax (HST), which is a single, blended combination of the GST and PST. Businesses can reduce the impact of sales tax for themselves and their customers by planning for the tax consequences of all activities. Sales tax reduction or mitigation strategies can include the following: Supply and demand In microeconomics , supply and demand
5106-455: The GST, and both are collected by Revenu Québec . Advertised and posted prices generally exclude taxes, which are calculated at the time of payment; common exceptions are motor fuels, the posted prices for which include sales and excise taxes, and items in vending machines as well as alcohol in monopoly stores. Basic groceries, prescription drugs, inward/outbound transportation and medical devices are zero-rated. Other provinces that do not have
5217-467: The Laws of Supply and Demand... of 1870. Both sorts of curve were popularised by Alfred Marshall who, in his Principles of Economics (1890), chose to represent price – normally the independent variable – by the vertical axis; a practice which remains common. If supply or demand is a function of other variables besides price, it may be represented by a family of curves (with
5328-515: The United States government has never used a general sales tax, an excise tax on whiskey enacted in 1791 was one of its first fund raising efforts. The unpopularity of this tax with farmers on the western frontier led to the Whiskey Rebellion in 1794. Federal and state sales taxes in the United States remained selective, rather than general, through the 19th century. However, excise taxes were applied to so many specific commodities during
5439-401: The analysis." The supply-and-demand model is a partial equilibrium model of economic equilibrium , where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements , as well as income levels of consumers are constant. This makes analysis much simpler than in
5550-456: The apparent revenue is churned – i.e. taxpayers are given the money to pay the tax, reducing net revenue. Refund delays by the tax administration can damage businesses. Compliance costs are seen as a burden on business. In the UK, compliance costs for VAT have been estimated to be about 4% of the yield, with greater impacts on smaller businesses. Under a sales tax system, only businesses selling to
5661-413: The certificate (or its ID number ) to a seller at the point of purchase, along with a statement that the item is for resale. The tax is otherwise charged on each item sold to purchasers without such a certificate and who are under the jurisdiction of the taxing authority. Other types of sales taxes, or similar taxes: Most countries in the world have sales taxes or value-added taxes at all or several of
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#17327653313285772-482: The chairmanship of Professor Fritz Neumark made its priority objective the elimination of distortions to competition caused by disparities in national indirect tax systems. The Neumark Report published in 1962 concluded that France's VAT model would be the simplest and most effective indirect tax system. This led to the EEC issuing two VAT directives, adopted in April 1967, providing a blueprint for introducing VAT across
5883-517: The collection of tax for specific commodities, such as cooking oil. Sales tax amounts, measured in drachmas at a rate of one percent, were recorded in a separate column of a record prepared for the auction of 16 slaves in Piraeus , Greece in 415 BC. Nearby Athens collected duties on the import and export of commodities, recorded at a rate of two percent in 399 BC. At that period of time, Athens did not rely on government agencies to collect its taxes;
5994-493: The consumer pays 10% ($ 0.15) extra, compared to the no taxation scheme, and the government collects this amount. The retailers pay no tax directly, but the retailer has to do the tax-related paperwork. Suppliers and manufacturers have the administrative burden of supplying correct state exemption certifications that the retailer must verify and maintain. The manufacturer is responsible for ensuring that their customers (retailers) are only intermediates and not end consumers (otherwise
6105-432: The cost of extra production is less than the market price. A rise in the cost of raw materials would decrease supply, shifting the supply curve to the left because at each possible price a smaller quantity would be supplied. This shift may also be thought of as an upwards shift in the supply curve, because the price must rise for producers to supply a given quantity. A fall in production costs would increase supply, shifting
6216-491: The demand curve to the new lower price. As a result of a supply curve shift, the price and the quantity move in opposite directions. If the quantity supplied decreases , the opposite happens. If the supply curve starts at S 2 , and shifts leftward to S 1 , the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. The quantity demanded at each price
6327-420: The demand for a metabolic intermediates while minimizing effects due to variation in the supply. Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model. This can be done with simultaneous-equation methods of estimation in econometrics . Such methods allow solving for the model-relevant "structural coefficients,"
6438-443: The demand is simple". It is presumably from this chapter that the idea spread to other authors and economic thinkers. Adam Smith used the phrase after Steuart in his 1776 book The Wealth of Nations . In The Wealth of Nations , Smith asserted that the supply price was fixed but that its "merit" (value) would decrease as its "scarcity" increased, this idea by Smith was later named the law of demand. In 1803, Thomas Robert Malthus used
6549-415: The effects from the initial equilibrium to the new equilibrium. When consumers increase the quantity demanded at a given price , it is referred to as an increase in demand . Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D 1 to the new curve D 2 . In the diagram, this raises
6660-427: The effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any. Hence this analysis is considered to be useful in constricted markets. Léon Walras first formalized the idea of a one-period economic equilibrium of the general economic system, but it
6771-517: The end-user are required to collect tax and bear the accounting cost of collecting the tax. Under VAT, manufacturers and wholesale companies also incur accounting expenses to handle the additional paperwork required for collecting VAT, increasing overhead costs and prices. The American Manufacturing Trade Action Coalition in the United States consider VAT charges on US products and rebates for products from other countries to be an unfair trade practice . AMTAC claims that so-called "border tax disadvantage"
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#17327653313286882-852: The endogenous variables on the respective exogenous variables. Demand and supply have also been generalized to explain macroeconomic variables in a market economy , including the quantity of total output and the aggregate price level . The aggregate demand-aggregate supply model may be the most direct application of supply and demand to macroeconomics, but other macroeconomic models also use supply and demand. Compared to microeconomic uses of demand and supply, different (and more controversial) theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply . Demand and supply are also used in macroeconomic theory to relate money supply and money demand to interest rates , and to relate labor supply and labor demand to wage rates. The 256th couplet of Tirukkural , which
6993-458: The entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point ( Q 1 , P 1 ) to the point ( Q 2 , P 2 ) . If the demand decreases , then the opposite happens: a shift of the curve to the left. If the demand starts at D 2 , and decreases to D 1 ,
7104-567: The equilibrium price from P 1 to the higher P 2 . This raises the equilibrium quantity from Q 1 to the higher Q 2 . (A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand", that is, a shift of the curve.) The increase in demand has caused an increase in (equilibrium) quantity. The increase in demand could come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause
7215-423: The equilibrium price will decrease, and the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change (shift) in demand. When technological progress occurs, the supply curve shifts. For example, assume that someone invents
7326-411: The estimated algebraic counterparts of the theory. The Parameter identification problem is a common issue in "structural estimation." Typically, data on exogenous variables (that is, variables other than price and quantity, both of which are endogenous variables) are needed to perform such an estimation. An alternative to "structural estimation" is reduced-form estimation, which regresses each of
7437-486: The expanded application is zero VAT for many operations and transactions. That zero VAT is the source of controversies between its trading partners, mainly Russia, which is against the zero VAT and promotes wider use of tax credits. VAT is replaced with fixed payments, which are utilized for many taxpayers, operations, and transactions. Legislation is based largely on the EU VAT Directive's principles. The system
7548-623: The experiment as successful, France introduced it domestically in 1958. Initially directed at large businesses, it was extended over time to include all business sectors. In France it is the largest source of state finance, accounting for nearly 50% of state revenues. Following creation of the European Economic Community in 1957, the Fiscal and Financial Committee set up by the European Commission in 1960 under
7659-467: The first sale or import) or soft drinks with high sugar (18%). AS of 2023, the VAT tax includes majority of services excluding Education, Health and Transport, as well as taxpayers issuing fee receipts. This tax makes the 41.2% of the total revenue of the country. VAT produces the largest share of China's tax revenue. In 1984 the State Council announced that China would begin collecting VAT. For
7770-426: The form of zero-rated goods and VAT exemption on goods not resold. Through registration, a business documents its purchases, making them eligible for a VAT credit. The main benefits of VAT are that in relation to many other forms of taxation, it does not distort firms' production decisions, it is difficult to evade, and it generates a substantial amount of revenue. VAT has no effect on how businesses organize, because
7881-500: The highest price. The demanders of labor are businesses, which try to buy the type of labor they need at the lowest price. The equilibrium price for a certain type of labor is the wage rate. However, economist Steve Fleetwood revisited the empirical reality of supply and demand curves in labor markets and concluded that the evidence is "at best inconclusive and at worst casts doubt on their existence." For instance, he cites Kaufman and Hotchkiss (2006): "For adult men, nearly all studies find
7992-600: The individual demand curves at each price. Common determinants of demand are: Since supply and demand can be considered as functions of price they have a natural graphical representation. Demand curves were first drawn by Augustin Cournot in his Recherches sur les Principes Mathématiques de la Théorie des Richesses (1838) – see Cournot competition . Supply curves were added by Fleeming Jenkin in The Graphical Representation of
8103-680: The individual firms' supply curves are added horizontally). Economists distinguish between short-run and long-run supply curve. Short run refers to a time period during which one or more inputs are fixed (typically physical capital ), and the number of firms in the industry is also fixed (if it is a market supply curve). Long run refers to a time period during which new firms enter or existing firms exit andall inputs can be adjusted fully to any price change. Long-run supply curves are flatter than short-run counterparts (with quantity more sensitive to price, more elastic supply). Common determinants of supply are: A demand schedule, depicted graphically as
8214-406: The labour supply curve to be negatively sloped or backward bending." Supply and demand can be used to explain physician shortages , nursing shortages or teacher shortages . In both classical and Keynesian economics, the money market is analyzed as a supply-and-demand system with interest rates being the price. The money supply may be a vertical supply curve, if the central bank of
8325-596: The main source of problems is carousel fraud . This fraud originated in the 1970s in the Benelux countries. VAT fraud then became a major problem in the UK . Similar fraud possibilities exist inside a country. To avoid this, countries such as Sweden hold the major owner of a limited company personally responsible. Because VAT is included in the price index to which state benefits such as pensions and welfare payments are linked in some countries, as well as public sector pay, some of
8436-428: The manufacturer charges the tax). In addition, the retailer tracks what is taxable and what is not, along with the various tax rates in each city where it operates. 10% VAT: In the VAT example above, the consumer has paid, and the government received, the same dollar amount as with a sales tax. At each stage of production, the seller collects a tax and the buyer pays that tax. The buyer can then be reimbursed for paying
8547-451: The market price. Thus the firm is not "faced with" any given price, and a more complicated model, e.g., a monopoly or oligopoly or differentiated-product model, should be used. Economists distinguish between the supply curve of an individual firm and the market supply curve. The market supply curve shows the total quantity supplied by all firms, so it is the sum of the quantities supplied by all suppliers at each potential price (that is,
8658-499: The money supply to determine the interest rate. According to some studies, the laws of supply and demand are applicable not only to the business relationships of people, but to the behaviour of social animals and to all living things that interact on the biological markets in scarce resource environments. The model of supply and demand accurately describes the characteristic of metabolic systems: specifically, it explains how feedback inhibition allows metabolic pathways to respond to
8769-507: The most well-known current sales taxes administered by the federal government. Twenty-two other states began imposing general sales taxes later in the 1930s, followed by six in the 1940s and five in the 1950s. Kentucky re-enacted its sales tax law in 1960. Eleven more states enacted sales tax laws during the 1960s, with Vermont as the last in 1969. Five states currently do not have general sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. The 2010 health care reform law imposed
8880-583: The national, state, county, or city government levels. Countries in Western Europe , especially in Scandinavia , have some of the world's highest valued-added taxes. Norway , Denmark and Sweden have higher VATs at 25%, Hungary has the highest at 27% although reduced rates are used in some cases, as for groceries, art, books and newspapers. In some jurisdictions of the United States, there are multiple levels of government which each impose
8991-478: The other hand, if availability of the good increases and the desire for it decreases, the price comes down." If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down. Shifting focus to the English etymology of the expression, it has been confirmed that the phrase 'supply and demand'
9102-579: The phrase "supply and demand" twenty times in the second edition of the Essay on Population . And David Ricardo in his 1817 work, Principles of Political Economy and Taxation , titled one chapter, "On the Influence of Demand and Supply on Price". In Principles of Political Economy and Taxation , Ricardo more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. In 1838, Antoine Augustin Cournot developed
9213-540: The practicality of enforcing it is impossible. As a result, online retail stores have had a distinct advantage in that they do not have to charge a sales tax. That has led many economists to examine consumer sensitivity when it comes to sales taxes. While some researchers have concluded a high elasticity of online purchase probability with respect to sales tax at around 2.3, others have found smaller figures of around 0.5. That means that enforcing an online sales tax would have negligible effects on aggregate sales. Economists at
9324-528: The price at which it is sold increases. VAT has been criticized by opponents as a regressive tax , meaning that the poor pay more, as a percentage of their income, relative to the wealthier individuals, given the higher marginal propensity to consume among the poor. Defenders reply that relating taxation levels to income is an arbitrary standard and that the VAT is in fact a proportional tax . An OECD study found that VAT could even be slightly progressive. VAT's effective regressivity can be reduced by applying
9435-494: The price of potatoes rises, the Irish peasant can no longer afford meat and eats more potatoes to cover for the lost calories. As with the supply curve, the concept of a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser have no influence over the market price. This is true because each point on the demand curve answers the question, "If buyers are faced with this potential price, how much of
9546-404: The product pay VAT on their own sales (output tax). The difference between output tax and input tax is the amount paid to the government (or refunded, in the case of a negative amount). Using accounts, the tax is calculated as a percentage of the difference between sales and purchases from taxed accounts. VAT provides an incentive for businesses to register and keep invoices, and it does this in
9657-410: The product will they purchase?" But, if a buyer has market power (that is, the amount he buys influences the price), he is not "faced with" any given price, and we must use a more complicated model, of monopsony . As with supply curves, economists distinguish between the demand curve for an individual and the demand curve for a market. The market demand curve is obtained by adding the quantities from
9768-526: The proportion of the number of buyer and sellers” and “that which regulates the price... [of goods] is nothing else but their quantity in proportion to [the] Vent.” Locke's terminology drew criticism from John Law. Law argued that,"The Prices of Goods are not according to the quantity in proportion to the Vent, but in proportion to the Demand." From Law the demand part of the phrase was given its proper title and it began to circulate among "prominent authorities" in
9879-490: The responsibility was delegated to the highest bidder, a practice known as tax farming . The Roman emperor Augustus collected funds for his military aerarium in AD 6 with a one percent general sales tax, known as the centesima rerum venalium (hundredth of the value of everything sold). The Roman sales tax was later reduced to a half percent ( ducentesima ) by Tiberius , then abolished completely by Caligula . Although
9990-455: The rules of the WTO is controversial; it was alleged that the proposed tax would favour domestically produced goods as they would be taxed less than imports, to a degree varying across sectors. For example, the wage component of the cost of domestically produced goods would not be taxed. A 2021 study reported that value-added taxes were unlikely to distort trade flows. The VAT rate is 20%. However,
10101-405: The same amount of tax is collected regardless of how many times goods change hands before arriving at the ultimate consumer. By contrast, sales taxes are collected on each transaction, encouraging businesses to vertically integrate to reduce the number of transactions and thereby reduce the amount of tax. For this reason, VAT has been gaining favor over traditional sales taxes. Another difference
10212-476: The same filing as their annual state income tax, but it is rare for them to do so. An exception is out-of-state purchase of automobiles. Then, use tax is collected by the state as part of registering the vehicle in California. The global trend has been for conventional sales taxes to be replaced by more broadly based value-added taxes. Value-added taxes provide an estimated 20% of worldwide tax revenue and have been adopted by more than 140 countries. The United States
10323-411: The slanted line and the constant- elasticity demand function (also called isoelastic or log-log or loglinear demand function), e.g., the smooth curve which can be rewritten as As a matter of historical convention, a demand curve is drawn with price on the vertical y -axis and demand on the horizontal x -axis. In keeping with modern convention, a demand curve would instead be drawn with price on
10434-448: The smooth curve which can be rewritten as The concept of a supply curve assumes that firms are perfect competitors, having no influence over the market price. This is because each point on the supply curve answers the question, "If this firm is faced with this potential price, how much output will it sell?" If a firm has market power—in violation of the perfect competitor model—its decision on how much output to bring to market influences
10545-514: The standard rate. Examples include hairdressers and barbers, bicycle repairs, footwear and clothing repairs, freelance journalists and models, cleaning services, and municipal waste. Sales tax When a tax on goods or services is paid to a governing body directly by a consumer, it is usually called a use tax . Often laws provide for the exemption of certain goods or services from sales and use tax, such as food, education, and medicines. A value-added tax (VAT) collected on goods and services
10656-457: The supply curve to the right and down. Mathematically, a supply curve is represented by a supply function, giving the quantity supplied as a function of its price and as many other variables as desired to better explain quantity supplied. The two most common specifications are: 1) linear supply function, e.g., the slanted line 2) the constant- elasticity supply function (also called isoelastic or log-log or loglinear supply function), e.g.,
10767-484: The tax burden lies primarily with the producer. To avoid altering demand, the producer will either avoid the tax if possible by relocating their fulfillment centers to areas without a high sales tax or they will internalize the cost of the sales tax by charging consumers the same price but paying for the tax from their profits. A tax imposed on the sale of goods is depicted on the walls of Egyptians tombs, which have been dated as far back as 2000 BC. These paintings describe
10878-644: The tax, but only by successfully selling the value-added product to the buyer at the next stage. In the previous examples, if the retailer fails to sell some of its inventory, it suffers a greater financial loss in the VAT scheme, in comparison to the sales tax regulatory system, by having paid a higher wholesale price on the product it wants to sell. Each business is responsible for handling the necessary tax paperwork. However, businesses have no obligation to request certifications from purchasers who are not end users, or of providing such certifications to their suppliers, but they incur increased accounting costs for collecting
10989-426: The tax, typically via a rebate to the exporter. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the producer. VAT raises about a fifth of total tax revenues worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD). As of June 2023, 175 of the 193 countries with UN membership employ a VAT, including all OECD members except
11100-422: The tax. The simplified examples assume incorrectly that taxes are non-distortionary: the same number of widgets were made and sold both before and after the introduction of the tax. However, the supply and demand economic model suggests that any tax raises the cost of the product for someone. In raising the cost, the supply curve shifts leftward. Consequently, the quantity of a good purchased decreases, and/or
11211-447: The theoretical basis of modern economics. In situations where a firm has market power , its decision on how much output to bring to market influences the market price, in violation of perfect competition. There, a more complicated model should be used; for example, an oligopoly or differentiated-product model. Likewise, where a buyer has market power, models such as monopsony will be more accurate. In macroeconomics , as well,
11322-408: The use of this phrase by effectively combining "supply" and "demand" together in a number of different occasions such as price determination and competitive analysis . In Steuart's chapter entitled "Of Demand", he argues that "The nature of Demand is to encourage industry; and when it is regularly made, the effect of it is, that the supply for the most part is found to be in proportion to it, and then
11433-410: The y axis as non-price determinants of demand change. Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes (attributed to George Stigler ): "A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed during
11544-423: Was French economist Antoine Augustin Cournot and English political economist Alfred Marshall who developed tractable models to analyze an economic system. The model of supply and demand also applies to various specialty markets. The model is commonly applied to wages in the market for labor . The typical roles of supplier and demander are reversed. The suppliers are individuals, who try to sell their labor for
11655-469: Was composed at least 2000 years ago, says that "if people do not consume a product or service, then there will not be anybody to supply that product or service for the sake of price". According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim scholars, such as fourteenth-century Syrian scholar Ibn Taymiyyah , who wrote: "If desire for goods increases while its availability decreases, its price rises. On
11766-630: Was defined as part of the Dormant Commerce Clause by the Supreme Court in the 1967 decision on National Bellas Hess v. Illinois . An attempt to require a Delaware e-commerce vendor to collect North Dakota tax was overturned by the court in the 1992 decision on Quill Corp. v. North Dakota . A number of observers and commentators have argued, so far unsuccessfully, for a Congressional adoption of this physical presence nexus test. The Internet Tax Freedom Act of 1998 established
11877-536: Was increased to 17.5% in 2011. The rate on restaurant and hotel accommodations is between 10% and 15% while certain foods and goods are zero-rated. The revenue is collected by the Barbados Revenue Authority . VAT was 20% as of 2023. A reduced rate of 9% applies to baby foods and hygiene products, as well as on books. A permanent rate of 9% applies to physical or electronic periodicals, such as newspapers and magazines. Goods and Services Tax (GST)
11988-730: Was introduced in 1991, replacing sales tax and most excise duties. The Value Added Tax Act, 1991 triggered VAT starting on 10 July 1991, which is observed as National VAT Day. VAT became the largest source of government revenue, totaling about 56%. The standard rate is 15%. Export is zero rated. Several reduced rates, locally called Truncated Rates, apply to service sectors and range from 1.5% to 10%. The Value Added Tax and Supplementary Duty Act of 2012 automated administration. The National Board of Revenue (NBR) administers VAT. Other rules and acts include Development Surcharge and Levy (Imposition and Collection) Act, 2015; and Value Added Tax and Supplementary Duty Rules, 2016. Anyone who collects VAT becomes
12099-400: Was introduced. In 2015, rates were revised to 21% for the standard rate, and 15% and 10% reduced rates. The lowest reduced rate primarily targeted baby food, medicines, vaccines, books, and music shops, while maintaining a similar redistribution of goods and services for the other rates. In 2024, a law aimed at reducing the national debt featured return to two rates: a standard rate of 21% and
12210-688: Was not used by English economics writers until after the end of the 17th century. In John Locke 's 1691 work Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money , Locke alluded to the idea of supply and demand, however, he failed to accurately label it as such and thus, he fell short in coining the phrase and conveying its true significance. Locke wrote: “The price of any commodity rises or falls by
12321-744: Was organized in March 2000. Cooperative efforts in this project by 44 state governments and the District of Columbia eventually produced the Streamlined Sales and Use Tax Agreement in 2010. This agreement establishes standards necessary for simplified and uniform sales tax laws. As of December 2010, 24 states had passed legislation conforming with the agreement. Whether the Streamlined Sales Tax can actually be applied to remote sales ultimately depends upon Congressional support, because
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