From Terry Arthur’s excellent talk at the PCPE (online at the Adam Smith Institute – Kevin will appreciate the irony, though I should note that Arthur’s actual affiliation is the IEA, not the ASI), noting how the practice of taxing transactions between firms but not within firms tends to encourage the latter at the expense of the former:
Without the tax wedge, the greater division of labour would allow more contracting out to take place, the average size of firm would be smaller, and the number of businesses would be larger. … Perhaps anti-capitalism protesters against giant global companies … should focus on campaigning for lower taxes as a means to promote smaller firms.
This last was obviously intended tongue-in-cheek; Arthur was surprised to learn that what he was imagining was quite real.
Don’t VATs take that into account?
Unfortunately, VATs are not the only taxes. They also create a huge drag on trade and productivity in the form of bureaucratic record keeping and paperwork. Their only purpose is to hide what amounts to a national sales tax from the public perception.