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Value added tax
Journal
of Public Economics
1 (1972)
3977400.
0 North-Holland
Publishing
Company
BOOK REVIEWS
Alan A. Tait, Value added
tax (McGraw-Hill,
1972, $3.60,
viii + pp. 184)
This book provides a useful service in giving us a good deal of information but is not very satisfactory on some counts, especially in its lack of theoretical precision at some crucial points. Taking the better aspects fist, anyone who wants a clear exposition of the mechanics of value added taxation and the main features of the tax on the Continent could search for some time before finding a more convenient exposition. Thus, for instance, the evolution of the tax in France and Germany, the EEC policy on VAT in relation to agriculture and the administrative problems of running VAT are all set out clearly and cogently. There are various chapters outlining the relative effects of VAT and a series of alternative taxes (retail sales tax, profits taxes, SET, etc.) - and our attention is drawn to such devices as the alteration of tax bases rather than tax rates to secure differential treatment of particular goods or services (see p. 61). Unfortunately, the catalogue of demerits is longer. The most serious is that the basic theoretical attributes of the tax are never explained as clearly as they should be. The fundamental similarity between retail sales taxation, expenditure taxation, income taxes with 100% initial allowances - and their dissimilarity from an ordinary income tax which allows only normal depreciation - is never brought out as pointedly or as sharply as it needs to be. Indeed, one is sometimes driven to ask whether the author has grasped the inner significance of allowing the full deductibility of capital expenditures just like other inputs. One would have thought that the references to VAT being a tax on wages plus profits (e.g., pp. 10 and 101) would have been more carefully tempered. Nor is there any overt sign of the recognition of the importance of Shoup’s demonstration (in Public Finance) of the near-equivalence of payroll taxation and VAT over longer time periods. The standard proposition about the effects of labour taxes on prices of capital goods as well as on the price of labour is mentioned on p.102 but in such an attenuated form as to be of doubtful value to the argument. Nor, as far as I can see, is there any reference at all to such important theoretical problems as the second-best question of the desirability of uniform ad valorem taxes when complete coverage is impossible; and the relative merits of ordinary income taxation and the value added tax family for risk-taking seem to escape consideration altogether. Nor, it would appear, is the author fully at home in the intricacies of the econometric testing of the hypothesis that corporation profits taxes are shifted; or at any rate the references to this subject on p.94 are not very adequate. Undoubtedly, the book was published at an inappropriate time from the UK standpoint. Coming out in February 1972 it was too late to influence the shape of the new VAT in the UK and yet too soon to discuss the various technical devices to be found in the new legislation. Thus the author quite properly draws attention on p.23 to the danger that an exempt business may try to dodge input tax by backward integration but he was unable to refer to clause 6.of the 1972 Finance Bill which gives the UK Treasury power to make orders deeming such situations to constitute a taxable supply from one stage to another. It must also be recorded that some loose ends have not been tidied up as neatly as they should have been. Thus the table on p.107 would seem to include a great deal of double counting; the totals are clearly wrong. There are also a number of references and/or statements
Book reviews
398
which are not quite correct, e.g., p.34n, p.94 (Committee and not Royal Commission), p.l06n, p.115 (SET and REP). Individually these are trivial; but they should not be there all the same. Some readers may also find the rather disjointed manner of presentation not entirely to their taste. So one’s overall judgment must be that this is a useful summary of the main features of VAT as it has evolved on the Continent but it is not a wholly adequate guide to the theoretical intricacies and is no guide at all to the details of the tax which is to operate in the UK from April 1973. London
E.J. Mishan, Cost-benefit
analysis
(London,
George
Allen and Unwin,
School
A.R. Prest of Economics
1971, 364 pp.)
The avowed intention of this book is “to convey to the interested reader with a smattering of economics some of the crucial notions and procedures that lie behind the techniques used in cost-benefit analysis. There should be enough in this volume to make him become more critical of the proposals of government officials and the reports of committees of “experts” enough, at any rate, to enable him to ask sensible questions of an official body and possibly embarassing ones also.” The underlying intellectual position is clear and stoutly defended. As the author says: “The sophisticated practitioner may observe that the analytic structure erected in this volume is somewhat monolithic. I state explicitly that cost-benefit analysis is an application of welfare economics and, more particularly, that the rationale of cost-benefit analysis is based on that of a potential Pareto improvement. This thesis runs through the book and what is valid and what is relevant is consistently determined by reference to it. There can be two possible objections to this procedure. First, it can be said that it ignores considerations of distribution and equity; second that it ignores indices of merit other than Pareto based ones.” The first is answered by pointing to three parts of the book which do explicitly deal with distributional patterns, and by stressing that “a project which meets an adopted cost-benefit test can properly be rejected on grounds of distribution or equity”. The second is set aside on the grounds that although other indicators may be legitimate, “until such social merit indicators have become more widely established, an introductory text may be justified in ignoring them”. Rather late on in the book, however, (after 300 pages of technical argument at various levels) this underlying philosophical position is reconsidered at some length in a chapter entitled “The social basis of welfare economics”. Here it is fist argued that the basic Paretian position cannot be regarded as unambiguous “until the economist has made a choice between the alternatives of grounding his welfare economics in utility or in ethics. If he chooses the former . then every effect on the individual’s utility is to count. If he chooses the latter . . . only those effects sanctioned by the constitution as valid are to be admitted into the economic calculus”, (the constitution in the context meaning those guiding rules which can truthfully claim to rest on a widely accepted ethical base). The latter might rule out certain interdependent (dis)utilities (such as envy, jealousy, racial or other intolerance, etc.) since the society might agree that “by reference to utility alone” if that utility “otherthey should not qualify for consideration wise affronts in any particular the moral sense of society”. Mishan does not seem to appreciate fully the corrosive implications of this proposition upon his very restrictive position on what is and is not admissible in a “valid” piece of cost-benefit analysis. For the “ethical position” implies that the decision maker is charged with laying down
of Public Economics
1 (1972)
3977400.
0 North-Holland
Publishing
Company
BOOK REVIEWS
Alan A. Tait, Value added
tax (McGraw-Hill,
1972, $3.60,
viii + pp. 184)
This book provides a useful service in giving us a good deal of information but is not very satisfactory on some counts, especially in its lack of theoretical precision at some crucial points. Taking the better aspects fist, anyone who wants a clear exposition of the mechanics of value added taxation and the main features of the tax on the Continent could search for some time before finding a more convenient exposition. Thus, for instance, the evolution of the tax in France and Germany, the EEC policy on VAT in relation to agriculture and the administrative problems of running VAT are all set out clearly and cogently. There are various chapters outlining the relative effects of VAT and a series of alternative taxes (retail sales tax, profits taxes, SET, etc.) - and our attention is drawn to such devices as the alteration of tax bases rather than tax rates to secure differential treatment of particular goods or services (see p. 61). Unfortunately, the catalogue of demerits is longer. The most serious is that the basic theoretical attributes of the tax are never explained as clearly as they should be. The fundamental similarity between retail sales taxation, expenditure taxation, income taxes with 100% initial allowances - and their dissimilarity from an ordinary income tax which allows only normal depreciation - is never brought out as pointedly or as sharply as it needs to be. Indeed, one is sometimes driven to ask whether the author has grasped the inner significance of allowing the full deductibility of capital expenditures just like other inputs. One would have thought that the references to VAT being a tax on wages plus profits (e.g., pp. 10 and 101) would have been more carefully tempered. Nor is there any overt sign of the recognition of the importance of Shoup’s demonstration (in Public Finance) of the near-equivalence of payroll taxation and VAT over longer time periods. The standard proposition about the effects of labour taxes on prices of capital goods as well as on the price of labour is mentioned on p.102 but in such an attenuated form as to be of doubtful value to the argument. Nor, as far as I can see, is there any reference at all to such important theoretical problems as the second-best question of the desirability of uniform ad valorem taxes when complete coverage is impossible; and the relative merits of ordinary income taxation and the value added tax family for risk-taking seem to escape consideration altogether. Nor, it would appear, is the author fully at home in the intricacies of the econometric testing of the hypothesis that corporation profits taxes are shifted; or at any rate the references to this subject on p.94 are not very adequate. Undoubtedly, the book was published at an inappropriate time from the UK standpoint. Coming out in February 1972 it was too late to influence the shape of the new VAT in the UK and yet too soon to discuss the various technical devices to be found in the new legislation. Thus the author quite properly draws attention on p.23 to the danger that an exempt business may try to dodge input tax by backward integration but he was unable to refer to clause 6.of the 1972 Finance Bill which gives the UK Treasury power to make orders deeming such situations to constitute a taxable supply from one stage to another. It must also be recorded that some loose ends have not been tidied up as neatly as they should have been. Thus the table on p.107 would seem to include a great deal of double counting; the totals are clearly wrong. There are also a number of references and/or statements
Book reviews
398
which are not quite correct, e.g., p.34n, p.94 (Committee and not Royal Commission), p.l06n, p.115 (SET and REP). Individually these are trivial; but they should not be there all the same. Some readers may also find the rather disjointed manner of presentation not entirely to their taste. So one’s overall judgment must be that this is a useful summary of the main features of VAT as it has evolved on the Continent but it is not a wholly adequate guide to the theoretical intricacies and is no guide at all to the details of the tax which is to operate in the UK from April 1973. London
E.J. Mishan, Cost-benefit
analysis
(London,
George
Allen and Unwin,
School
A.R. Prest of Economics
1971, 364 pp.)
The avowed intention of this book is “to convey to the interested reader with a smattering of economics some of the crucial notions and procedures that lie behind the techniques used in cost-benefit analysis. There should be enough in this volume to make him become more critical of the proposals of government officials and the reports of committees of “experts” enough, at any rate, to enable him to ask sensible questions of an official body and possibly embarassing ones also.” The underlying intellectual position is clear and stoutly defended. As the author says: “The sophisticated practitioner may observe that the analytic structure erected in this volume is somewhat monolithic. I state explicitly that cost-benefit analysis is an application of welfare economics and, more particularly, that the rationale of cost-benefit analysis is based on that of a potential Pareto improvement. This thesis runs through the book and what is valid and what is relevant is consistently determined by reference to it. There can be two possible objections to this procedure. First, it can be said that it ignores considerations of distribution and equity; second that it ignores indices of merit other than Pareto based ones.” The first is answered by pointing to three parts of the book which do explicitly deal with distributional patterns, and by stressing that “a project which meets an adopted cost-benefit test can properly be rejected on grounds of distribution or equity”. The second is set aside on the grounds that although other indicators may be legitimate, “until such social merit indicators have become more widely established, an introductory text may be justified in ignoring them”. Rather late on in the book, however, (after 300 pages of technical argument at various levels) this underlying philosophical position is reconsidered at some length in a chapter entitled “The social basis of welfare economics”. Here it is fist argued that the basic Paretian position cannot be regarded as unambiguous “until the economist has made a choice between the alternatives of grounding his welfare economics in utility or in ethics. If he chooses the former . then every effect on the individual’s utility is to count. If he chooses the latter . . . only those effects sanctioned by the constitution as valid are to be admitted into the economic calculus”, (the constitution in the context meaning those guiding rules which can truthfully claim to rest on a widely accepted ethical base). The latter might rule out certain interdependent (dis)utilities (such as envy, jealousy, racial or other intolerance, etc.) since the society might agree that “by reference to utility alone” if that utility “otherthey should not qualify for consideration wise affronts in any particular the moral sense of society”. Mishan does not seem to appreciate fully the corrosive implications of this proposition upon his very restrictive position on what is and is not admissible in a “valid” piece of cost-benefit analysis. For the “ethical position” implies that the decision maker is charged with laying down