Modeling Consumption Tax

Posted Apr 24, 2014
Last Updated May 13, 2014

Note: I’m using eRep speak here for braindumping. Dominomics is obviously going to have different raw and manufactured goods than eRep, but most of the people reading this are familiar with eRep.

Here are some simple models of two popular consumption tax options.

Most US States Sales Tax

WRM is produced (No tax)
WRM is sold to company for manufacturing for $10 (No tax)
WRM is converted into Weapons (No tax)
Weapons are sold for $21 ($20 + $1 after tax) (5% Tax is collected from consumer and $1 remitted to the government)

VAT

WRM is produced (No tax)
WRM is sold to company for manufacturing for $10.50 ($10 + $0.50 tax) (5% Tax is collected from manufacturer and $0.50 remitted to the government)
WRM is converted into Weapons (No tax)
Weapons are sold for $21 ($20 + $1 tax) (5% Tax is collected from consumer ($1), but only $0.50 is remitted to the government.)

Assuming that all goods are sold, in all both models, each company has the same gross margin, and the government gets the same amount of tax.

eRep VAT (not really VAT)

WRM is produced (No tax)
WRM is sold to company for manufacturing for $10.50 ($10 + $0.50 tax) (5% Tax is collected from manufacturer and $0.50 remitted to the government)
WRM is converted into Weapons (No tax)
Weapons are sold for $21 ($20 + $1 tax). Tax is collected (5% Tax is collected from consumer and $1.00 is remitted to the government.)

The weapon manufacturer makes $0.50 less, and the government gets $0.50 more. I can see why eRep did what they did, as it is very easy to model in code. It also collapses to the sales tax model if you simply have 0% tax on raw goods. In game, since the owners don’t have to do paperwork, all of this is instant an human-proof.

In eRep, raw goods have no use except for conversion into finished goods, so all three of these models are OK. In Dominomics, like RL, some intermediate goods can be used or further processed. For example, if I buy chocolate as a consumer, I pay sales tax, but if I buy chocolate as a baker, I do not. The end consumer pays the tax on the cake I make. In US State sales tax, it is up to the seller to determine if the purchaser must be taxed. VAT takes away this need for evaluation, and I think this is the model that Dominomics is going to try.

Chocolate

Beans are harvested
Beans are sold for $10.50 ($10 + $0.50 tax) (5% Tax is collected from the chocolatier and $0.50 remitted to the government)
Chocolate is created from Beans
Chocolate is sold for $21 ($20 + $1 after tax) (5% Tax is collected from consumer ($1), but only $0.50 is remitted to the government)

Chocolate Cake

Beans are harvested
Beans are sold for $10 ($10.50 after tax) (5% Tax is collected from the chocolatier and $0.50 remitted to the government)
Chocolate is created from Beans
Chocolate is sold for $20 ($21 after tax) (5% Tax is collected from the baker ($1), but only $0.50 is remitted to the government)
Cake is created from Chocolate
Cake is sold for $30 ($31.50 after tax) (5% Tax is collected from the consumer ($1.50), but only $0.50 is remitted to the government)

Note that this means the money you have paid in taxes but have not yet recovered increases the further up the chain you are. I guess that’s an incentive to sell. The tax burden is still entirely on the consumer, but there is no need for a formal definition of consumer, because it is just assumed to be whoever doesn’t add additional value by selling the good.

This is marginally harder to model in code, but not outside the scope of what the engine can do. It is important that I keep this in mind while designing data structures for goods, recipes, and laws. The only caveat is that items must retain information after sale to track the amount of VAT that needs not be remitted. Even when stacked, items must retain unique identities. This is a challenge to design, as it increases the size of data structures and inventories quite a bit.

EDIT:

Most likely, I will be using a simple tax on transactions. Governments will set the tax for each product’s sales. Even though VAT can be modeled in the system, it probably shouldn’t be, as it will add complexity and player confusion at no real gameplay benefit.

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