Value Added Tax One

Value Added Tax One

Value-added Tax, one levied on net business turnover. It differs from a turnover tax in eliminating from the taxable 'base' the cost of inputs' of materials, labour, etc. For example, a shirt selling for £75. might include £11. worth of services contributed each by the spinner, weaver, manufacturer and distributor. A value-added tax would be levied on each of these items and would thus be similar in effect to a retail sales tax levied on the £45, sale price. A turnover tax levied on gross turnover would by contrast be levied on £79, of the spinner's, plus £13. of the weaver's, plus £32, of the manufacturer's, plus £66 of the distributor's gross sales, that is on £126. in all.

Variable Costs, those which vary with output. Some of the costs of a firm are independent of the output it produces, some are dependent on it. For example, the rent of a building or interest charges on borrowed capital do not normally change as output increases or decreases; but the costs of raw materials and the wages of labour used directly in production, such as engineers or mechanics in a car factory, alter with output. This distinction applies in the short run when the size of the enterprise is unchanged; in the long run all costs vary with output since the scale of operations can be increased or decreased by enlarging or cutting down the plant and equipment (down to nothing if the firm goes out of existence) Much economic analysis is concerned with the behaviour of cost as output varies; one of the basic ideas is that in the short-run period when a producer's equipment cannot be increased the rate at which total variable cost rises as output expands will first decrease and then increase (because of variable proportions). There is therefore for each firm an 'equilibrium' level of output at which profits will be larger than at any lower or higher level. This will be the point at which the rate of change of total variable cost is just equal to the rate of change of total revenue (provided that total revenue is larger than total variable cost).

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