VAT Passage Means More Mergers and Less Acquisitions
Ignoring the fact that a Value Added Tax will allow the government to tax again post-tax savings, there is one more element often overlooked by politicians and economists alike. The VAT will stir vertical integration from top to bottom.
Economics of the VAT
Proponents of the Value Added Tax argue that the new tax code would be more efficient than the existing form, and avoid possibilities of subsidizing some market actions and deterring others. The problem, however, is that the VAT creates another problem for small firms that can only be avoided by economies of scale.
How it Works, and Why it Sucks
Proponents argue the VAT will affect all businesses equally. Assume that there are two firms, one that produces lumber and one that makes baseball bats. The lumber producer buys its components (acreage, energy, labor) for $1000, and sells the wood to the baseball bat company for $5000. The company adds $4000 of value, and pays a 10% VAT of $400. The baseball bat company buys the wood for $5000, a little bit of labor and energy for $1000, and sells the bats for $10,000, creating $4000 in value. They, too, pay $400 in a VAT.
Proponents would say that whether the lumber producer and the baseball company are combined or operated separately, $800 in revenue would be generated. That is true, but you have to consider the incredible costs involved with cost accounting. Both firms, when operated separately or as one, will require an intensive accounting program to find every single cost that goes into the finished product. When separated, there are more costs due to administrated. When combined, the two save. Don’t think this won’t play into acquisitions as companies will be able to realize huge administrative savings by buying their suppliers. Other interested parties, those interested in an acquisition, rather than a merger, will be priced out. They will realize no savings.
