Lumberjacks, Carousels and the GST

Today I learned how to participate in a tax fraud scheme that could easily earn me millions of dollars. Yep, that's just how we roll in the Economics department.

Today's Economics of Taxation class was one of the best ever. It started out with Dr. W announcing excitedly,

"Today we're going to learn about Carousel Fraud. This is actually a really profitable fraud scheme that is hard to detect, so you can scam millions of dollars from the government with it."

Wouldn't you be excited if that's what your prof told you at the beginning of a 75-minute class on taxes? It got even better when he began explaining the necessary theories we had to have under our belts before we could tackle Carousel fraud.

We were learning about Value-Added Taxes and how they work compared to Retail Sales Taxes and our professor gave a great analogy using furniture manufacturing. We started with a lumberjack cutting down a tree and selling it to a lumber mill, who then sells the boards to a furniture factory, who sells the furniture to Wal-Mart, who then sells it to you. If you're the kind of person who buys furniture at Wal-Mart, that is. I've heard that there are people who scorn it. We then proceeded to dissect the impact of the GST on all the different transactions within this tree's life cycle. It started out with this gem of a quote from Dr. W:

"To simplify this model, we're going to assume that the lumberjack has no inputs. He never bought a saw or anything. I guess he just went into the woods and tore it to the ground with his bare hands. Or maybe he used his teeth, I don't know."

It was with this image in my head that I heard his question a moment later, "So how much GST does the burly lumberjack pay?"

And if this wasn't the best class ever, Dr. Wen then proceed to tell us how all we need to do is move to Europe, buy a large shipment of cell phones (computer chips work as well), and set up three dummy companies in two different countries, then we can be scamming the government out of millions of dollars each year! All said with a straight face!

I feel like I got my full tuition's worth out of the Economics of Taxation in today's lecture alone.