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FULL TEXT: CRS REPORT ON VAT FOR CONGRESS.

DEC. 11, 1992

FULL TEXT: CRS REPORT ON VAT FOR CONGRESS.

DATED DEC. 11, 1992
DOCUMENT ATTRIBUTES
  • Authors
    Bickley, James M.
  • Institutional Authors
    Congressional Research Service
  • Index Terms
    VAT
    OECD
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-3243 (45 original pages)
  • Tax Analysts Electronic Citation
    93 TNT 56-46

                          James M. Bickley

 

                    Specialist in Public Finance

 

                         Economics Division

 

 

                          November 27, 1989

 

                      Revised December 11, 1992

 

 

                     VALUE-ADDED TAX: CONCEPTS,

 

                 POLICY ISSUES, AND OECD EXPERIENCES

 

 

SUMMARY

Some Members of Congress have expressed interest in the feasibility of levying a value-added tax (VAT) to reduce large forecast budget deficits. A VAT is imposed at all levels of production on the differences between firms' sales and their purchases from all other firms. A VAT is assumed to be fully shifted forward to consumers, hence, a VAT is a type of general consumption tax. In comparison to the United States, most member nations of the Organization for Economic Cooperation and Development (OECD) place both a higher reliance on general consumption taxation and a lower reliance on individual income taxes. Of the 24 nations in the OECD, only the United States does not have a broad-based consumption tax at national level.

For fiscal year 1994, a comprehensive U.S. VAT would raise approximately $35 billion for each one percent levied. Data on VATs in other OECD nations suggest that a U.S. VAT could be administered at a reasonable cost and with reasonably good compliance.

If disposable income over a one-year period is the measure of ability-to-pay, then a VAT would be extremely regressive; that is, the percentage of disposable income paid in VAT would decrease rapidly as disposable income increases. If disposable income over a lifetime is the measure of ability-to-pay, a constant-rate VAT would be mildly regressive. Options do exist to reduce or eliminate this regressivity; three possible methods are exclusions and multiple rates, income tax credits, and earmarking of some revenue for increased social spending. If consumption over either a one-year period or a lifetime is the measure of ability-to-pay, a VAT would be proportional; that is, the percentage of consumption paid in VAT would be the same as consumption increases.

From an economic perspective, a major revenue source is better the greater its neutrality; that is, the less the tax alters economic decisions. A VAT is a relatively, but not completely, neutral tax. A VAT or any other tax that sharply reduces the deficit would raise the rate of national savings. But the prevailing view of economists is that neither a VAT nor any other major tax change would significantly affect households' propensities to save.

The imposition of a VAT would cause a one-time increase in this country's price level. But a VAT would not affect this country's future rate of inflation if the Federal Reserve offsets the contractionary effects of a VAT with a more expansionary monetary policy. If the United States continues its policy of flexible exchange rates, then the imposition of a VAT, compared to any other major tax increase, would not significantly affect the U.S. balance- of-trade. Empirical studies of the effect of a VAT on the size of the public sector are inconclusive. A Federal VAT would encroach on the States' primary source of revenue, the retail sales tax; but the Federal Government and the States already share many sources of revenue in relative harmony. Public opinion surveys show a preference for a VAT over higher individual income taxes.

TABLE OF CONTENTS

CONCEPT OF A VALUE-ADDED TAX

 

     TYPES OF VAT

 

     METHODS OF CALCULATING VAT

 

     EXEMPTION VERSUS ZERO-RATING

 

 

COMPOSITION OF TAXES: UNITED STATES COMPARED TO OTHER

 

     OECD NATIONS

 

 

REVENUE YIELD

 

     VAT BASE

 

     REVENUE ESTIMATES

 

 

ADMINISTRATIVE COST

 

 

COMPLIANCE

 

 

EQUITY

 

     ABILITY-TO-PAY

 

     TIME PERIOD

 

     VERTICAL EQUITY

 

     POLICY OPTIONS TO ALLEVIATE REGRESSIVITY

 

          Exclusions and Multiple Rates

 

          Credit

 

          Earmarking of VAT Revenues

 

     HORIZONTAL EQUITY

 

 

NEUTRALITY

 

 

NATIONAL SAVING

 

 

INFLATION

 

 

BALANCE-OF-TRADE

 

 

SIZE OF GOVERNMENT

 

 

INTERGOVERNMENTAL ISSUES

 

     ENCROACHMENT ON A STATE TAX SOURCE

 

     JOINT COLLECTION

 

 

PUBLIC OPINION

 

 

APPENDIX A. CREDIT-INVOICE, SUBTRACTION, AND ADDITION METHODS

 

 

APPENDIX B. ECONOMIC EFFECTS OF A SPECIAL VAT TREATMENT

 

 

APPENDIX C. COMPOSITION OF TAXES

 

 

APPENDIX D. POSSIBLE BASES FOR A VALUE-ADDED TAX

 

 

APPENDIX E. SUMMARY EXAMPLES OF EXEMPTIONS AND ZERO RATES

 

 

APPENDIX F. VAT RATES IN OECD COUNTRIES

 

 

APPENDIX G. PERCENTAGE DISTRIBUTION OF STATE TAX COLLECTIONS

 

 

APPENDIX H. FEDERAL TAX COLLECTIONS BY TYPE OF TAX

 

 

APPENDIX I. SURVEYS OF PUBLIC OPINION

 

     ACIR SURVEY

 

     MEDIA GENERAL/ASSOCIATED PRESS POLL

 

     THE HARRIS POLL

 

 

SELECTED BIBLIOGRAPHY

 

 

VALUE-ADDED TAX: CONCEPTS, POLICY ISSUES, AND OECD EXPERIENCES

Large projected deficits in the Federal budget have generated congressional interest in new sources of revenue. 1 One policy option has been the imposition of a value-added tax (VAT) because of its high revenue potential and widespread use by other developed nations. This CRS report examines 13 aspects of a VAT relevant to the issue of levying a VAT for deficit reduction. These aspects are the concept of a value-added tax, comparison of the composition of taxes between the United States and other OECD nations, revenue yield, administrative cost, compliance, equity, neutrality, national saving, inflation, balance-of-trade, size of Government, intergovernmental relations, and public opinion. This report considers the experiences of the 21 nations (out of 24 nations) with VATs in the Organization for Economic Cooperation and Development (OECD) relevant to the feasibility and operation of a U.S. VAT. 2

CONCEPT OF A VALUE-ADDED TAX

A value-added tax is a tax, levied at each stage of production, on firms' value added. The value added of a firm is the difference between a firm's sales and a firm's purchases of inputs from other firms. In other words, a firm's value added is simply the amount of value a firm contributes to a good or service by applying its factors of production (land, labor, capital, and entrepreneurial ability). 3 Another method of calculating a firm's value added is to total the firm's payments to its factors of production.

TYPES OF VAT

There are three types of VATs which differ in their tax treatment of purchases of capital inputs (plant and equipment). Under the consumption VAT, capital purchases are treated the same way as the purchase of any other input. This tax treatment of capital purchases is equivalent to expensing. Under the income VAT, the VAT paid on the purchases of capital inputs is amortized (credited against the firm's VAT liability) over the expected lives of the capital inputs. Under the gross product VAT, no deduction for the VAT on purchases of capital inputs is allowed against the firm's VAT liability.

All 21 OECD nations with VATs use the consumption type. The consumption VAT is the type usually advocated for this country. Indeed, most VAT advocates intend to shift tax burdens from capital income to consumption. Furthermore, a consumption VAT is simpler to compute because firms do not have to separate expenditures for capital from other expenditures.

METHODS OF CALCULATING VAT

There are three alternative methods of calculating VAT: credit method, subtraction method, and addition method. 4 Under the credit method, a firm would calculate the VAT to be remitted to the Government by a two-step process. First, the firm would multiply its sales by the tax rate to calculate VAT collected on sales. Second, the firm would credit VAT paid on inputs against VAT collected on sales and remit this difference to the Government. The firm would calculate its VAT liability before setting its prices in order to fully shift the VAT to the buyer. Under the credit-invoice method, a type of credit method, the firm is required to show VAT separately on all sales invoices and to calculate the VAT credit on inputs by adding all VAT shown on purchase invoices.

Under the subtraction method, the firm would calculate its value added by subtracting its cost of taxed inputs from its sales. Next, the firm determines its VAT liability by multiplying its value added by the VAT rate. Under the addition method, the firm would calculate its value added by adding all payments for untaxed inputs (e.g. wages and profits). Next, the firm would multiply its value added by the VAT rate to calculate VAT to be remitted to the Government.

The credit invoice method is used by all 21 OECD nations with VATs. Both the credit-invoice and the subtraction methods have been discussed for the United States. The prevailing view of economists is that the credit-invoice method is superior. This method requires registered firms to maintain detailed records that are cross indexed with supporting documentation. A VAT shown on the sales invoice of one firm is the same as the VAT shown on the purchase order of another firm. Hence, the credit-invoice method allows tax auditors to cross check the records of firms. Also, each firm has a vested interest in insuring that the VAT shown on their purchase orders is not understated in order that the firm receive full credit against VAT liability for VAT previously paid. Thus, the credit-invoice method could be easier to enforce. The credit-invoice method is probably the only feasible method if there are to be multiple tax rates.

Supporters of the subtraction method maintain that it would have low compliance costs because all necessary data could be obtained from records kept by a firm for other purposes. But a firm would still have to make calculations based on these data. For example, deductible expenses would have to be separated from nondeductible expenses, and some data expressed on an accrual basis would have to be converted to a cash flow basis.

The credit-invoice method would have substantial compliance costs because the amount of VAT would have to be shown on every sales invoice (and conversely on every purchase invoice). But the credit- invoice method would yield an additional data base to firms. Some firms might find these additional data useful in decision making. For example, records of purchase invoices and sales invoices may improve some firms' control over their inventories. Compliance costs of the credit-invoice method might be partially offset by the value of the VAT data base to firms, but this value has never been quantified.

The credit-invoice method would have greater administrative costs than the subtraction method because of its requirements for additional data, computations, and record-keeping. Although there are data on the administrative costs of a VAT calculated by the credit- invoice method, empirical data are not available on the subtraction method; consequently, a quantitative comparison of costs currently is not feasible. The subtraction method would not work administratively if many goods are exempt or if multiple tax rates are levied. Thus, the subtraction method would reduce the flexibility of Congress in formulating a VAT. Special interest groups, however, would have difficulty amending legislation to assist their memberships. Unless specified otherwise, this report will assume that the credit-invoice method is used and that the VAT is the consumption type. 5

EXEMPTION VERSUS ZERO-RATING

No VAT proposal would require all firms to collect the VAT. The two fundamental methods of giving special tax treatment to businesses in an industry under a VAT are exemption and zero-rating. An exempt business would not collect VAT on its sales and would not receive credit for VAT paid on its purchases of inputs. An exempt business would not register with tax authorities, and, consequently, would not be part of the VAT system. Hence, an exempt business would not have the usual VAT compliance costs and would not impose administrative costs on the Government (except verification of its exemption, of course). An exempt business's costs, however, include any tax paid on inputs, because it receives no credit for previously paid taxes.

A zero-rated business would not collect VAT on its sales but would receive credit for VAT paid on its inputs. This is equivalent to the business being charged a zero tax rate. A zero-rated business would be a registered taxpayer, and, consequently, would involve the usual compliance and administrative costs. A zero-rated business, however, receives a refund of any VAT paid on its inputs, so its costs do not include VAT paid at earlier stages. The effects on final prices and total VAT collected by the Government caused by exempting or zero-rating firms would vary with the stage of production. (The operational assumption is that a VAT is fully shifted forward in all prices.)

An exempt retailer would not charge any VAT on his sales but he would not receive any credit for VAT previously paid on inputs, so his price to the final consumer would include all VAT paid except that on his own value-added. The Government would have collected a tax on all the value added in the product except the retailer's.

A zero-rated retailer would not charge any VAT on his sales, but he would receive credit for all VAT previously paid on inputs. A zero-rated retailer would not remit VAT to the Government, but he would receive a refund for VAT previously paid by suppliers. Hence, the price of the commodity would not include any VAT, and the Government would receive no revenue.

Exempting or zero-rating a retailer, the final stage of production and distribution, would not affect the linkage (or chain) of VAT collections and credits between different stages of production. But exempting or zero-rating an intermediate stage such as manufacturing of wholesaling would break the chain between firms at different stages of production.

Exempting, however, causes a far more serious break than zero- rating. For example, an exempt manufacturer would not collect VAT on sales to a wholesaler and would not receive credit for VAT paid on inputs. A nonexempt wholesaler would not receive credit for the VAT paid on the manufacturer's inputs included in the price he paid the manufacturer. But the wholesaler would remit VAT collected on all of his sales, so some of the value added in the product would be taxed twice. Consequently, exempting a manufacturer or any other intermediate producer would increase total VAT collected by the Government and the final retail price of the commodity.

A zero-rated manufacturer would not collect VAT on sales but would receive credit for VAT paid on inputs. The price paid by the wholesaler, therefore, would contain no VAT. The nonexempt wholesaler would collect VAT on sales and would not be eligible for any VAT credits, but the total VAT at that point would exactly equal what it would have been had there been no untaxed stage. Subsequent stages of production would charge VAT on sales and would receive credit for VAT paid on inputs as though there had been no break in the chain. Hence, zero-rating a manufacturer or other intermediate stage would change neither total VAT remitted nor the retail price on the commodity. 6

If both zero-rated firms and exempt firms operate at the same level of production in the same industry, the zero-rated firms would have a competitive advantage, because their costs are less by the amount of the VAT.

Policy makers may be faced with a decision to either zero-rate or exempt a particular product.

. . . zero-rating is desirable when the objective is to exclude the consumption of the product completely from tax, where an exemption is warranted when it is not regarded as feasible or desirable to tax the activity but some tax on final consumption is considered desirable.

There are two major objections to exemption. First, cascading results as the exempt firms and their business customers cannot receive input tax credit. Secondly, firms producing both exempt and taxable (including zero-rated) items must allocate inputs between exempt and non-exempt categories, and this is difficult to accomplish in any non-arbitrary way and to control. 7

COMPOSITION OF TAXES: UNITED STATES COMPARED TO OTHER OECD NATIONS 8

One argument frequently made for a U.S. VAT is the relative reliance on consumption taxes in other developed countries. Most other countries do in fact rely more on consumption taxes.

For fiscal year 1989, the United States (Federal, State, and local governments) relied less on all types of taxes on goods and services (16.2 percent of total tax revenues) than any other nation in the OECD except Japan (12.6 percent). These types of taxes on goods and services were import duties, profits on public fiscal monopolies, licenses and other business taxes, specific sales taxes, and general sales taxes. For only general taxes on goods and services (VATs, retail sales taxes, wholesale sales taxes, and manufacturers' sales taxes), the United States had a lower reliance (7.4 percent of tax revenues) than any other nation except Japan (3.3 percent of tax revenue). 9

For fiscal year 1989, the reliance of the United States on individual income taxes (35.7 percent of total revenue) was exceeded by only six other OECD nations. Four of these nations (Australia, Finland, New Zealand, and Sweden) did not levy social security taxes on employees. For the United States, direct taxes on employees (individual income taxes and social security taxes) accounted for a higher percentage of tax revenue (47.2 percent) than in all other OECD nations except Denmark (54.3 percent).

In summary, the United States places a much higher reliance on direct taxes on employees and a much lower reliance on taxes on goods and services than most other nations in the OECD.

REVENUE YIELD 10

The primary reason for considering a VAT for deficit reduction is its enormous revenue potential. Economists and public officials use the operating assumption that a VAT would be fully shifted to final consumers in the form of higher prices of goods. This assumption of full shifting was used to make the revenue estimates in this report. A VAT (or any other major tax increase) would have a contractionary effect on the economy unless offset by other economic policies. Consequently, the revenue estimates in this report are made under the assumption that the Federal Reserve would use an expansionary monetary policy to neutralize the contractionary effects of a VAT. These revenue estimates also do not take into account the possible shifts in consumption patterns that might be expected if some items are taxed and others are excluded from taxation.

VAT BASE

The potential revenue per one percent rate from a VAT would vary with the comprehensiveness of the tax base. A broad-based VAT would have limited exclusions, while a narrow-based VAT would have numerous exclusions. Obviously, the broader the tax base, the lower the tax rate necessary to raise a given amount of revenue.

Furthermore, the broader the VAT base, the more efficient is the tax system. The exclusion of goods from taxation changes their prices relative to taxed goods. Changes in relative prices cause economic distortions. Consumers tend to substitute lower priced goods for higher priced goods.

There are two primary justifications for excluding specific items from taxation. First, the VAT would be too difficult to collect on some goods and services because sellers could easily avoid reporting their sales. Second, some goods are excluded on equity grounds, since these goods claim disproportionately large percentages of the incomes of lower income families.

As shown in appendix D, broad and narrow bases for a VAT were formulated by CRS after reviewing the literature and examining practices of countries in the OECD. For fiscal year 1994, a broad- based VAT would tax 77.1 percent of total consumption and a narrow- based VAT would tax 46.6 percent. 11 OCD "data . . . suggest that . . . over 70 percent of total consumption was usually in the base of VAT countries." 12 For OECD nations, particularly those in the European Community (EC), there has been a trend towards broadening their VAT bases. 13 But OECD nations still exempt or zero-rate numerous goods. 14

REVENUE ESTIMATES

Data Resources, Inc. (DRI) forecasts that personal consumption expenditures will be $4,488 billion in current dollars for fiscal year 1994 (October 1, 1993 September 30, 1994). 15 This aggregate level of personal consumption expenditures and the tax bases formulated by CRS may be used to estimate revenue yields per one percent VAT, all other things being equal. Each one percent tax would yield $34.6 billion (.01 x .771 x $4,488 billion) for abroad-based VAT. If a VAT is levied on 70 percent of total consumption (typical of many OECD nations with VATs) then the revenue yield would be $31.4 billion (.01 x .70 x $4,488 billion).

A VAT will cause a one-time increase in the price level as discussed in the section on inflation in this report. For example, a four percent VAT on 75 percent of consumer expenditures would raise the price level by approximately three percent. The greater the revenue yield from a VAT, the greater will be the rise in the price level. Inflation lowers the real dollar value of the revenue yield from a VAT. Thus, the expected yield in real dollars from a broad- based U.S. VAT would be slightly lower than the estimates in the preceding paragraph.

The robustness of the VAT not only makes it a possible source for deficit reduction but also has generated concerns among some that VAT revenues may finance a larger public sector. This issue of VAT and the size of government is examined in a later section of this report.

ADMINISTRATIVE COST

The value-added tax would require the expansion of the U.S. Internal Revenue Service. But the high revenue yield from a VAT could cause administrative costs to be low measured as a percentage of revenue yield. Tax studies in Sweden, the United Kingdom, Portugal, and Australia found that administrative costs as a percentage of revenue were less for their broad-based consumption taxes than for their income taxes. 16 The OECD has concluded that "data . . . suggest from the experiences of a few countries that consumption tax revenues can be collected at a lower average cost than income taxes for a similar amount of revenue." 17

But, for the purposes of this report, the relevant comparison is between a VAT collected by the credit-invoice method and an increase in the individual income tax because the United States already has an administrative apparatus to collect the individual income tax. A VAT would have significant administrative costs because it is a new tax, while the administrative costs of an increase in the individual income tax would be minimal.

The administrative expense per dollar of VAT collected would vary with the degree of complexity of the VAT, the amount of revenue raised, the national attitude towards tax compliance, and the level of the small business exemption. Proposed VATs for deficit reduction usually are estimated to yield approximately $100 billion per fiscal year which would result in the spreading of administrative costs.

In 1984, officials at the U.S. Treasury estimated that a completely phased in VAT would require additional staff of 20,694 at a cost of $700 million or approximately $1 billion at 1991 salary levels. This Treasury estimate was based on the assumption that all 20 million U.S. firms would be taxed. 18 Many countries exempt small businesses from the VAT in order to eliminate compliance costs of small businesses and reduce administrative costs of government. In 1985, approximately 60 percent of all agricultural and nonagricultural firms (sole proprietorships, partnerships, and corporations) had business receipts of less than $25,000. 19 These small firms accounted for less than one percentage of total business receipts. 20 Thus, under the assumption that firms' total receipts and value-added are highly correlated, the IRS could reduce the number of firms subject to the VAT from 20 million to eight million with little loss of revenue. There would, of course, be some loss in economic efficiency (see p. 18).

As shown in table 1, however, the Treasury's estimated ratio of staff to taxpayers of 1 to 1,000 is much lower than the actual ratio of the six listed nations in the EC. Even if the number of taxpayers is reduced to eight million, the ratio remains at a fairly low 1:400. There may be some economies of scale in the administration of a VAT, furthermore, the VAT constructed by the Treasury for the United States is simpler, and less costly to administer than existing VATs in the EC, so Treasury's cost estimates could be fairly close to the mark. But a VAT may start out simple yet become extremely complex over time.

       TABLE 1. Ratio of Staff to Taxpayers to Administer a VAT

 

 

                                                   Ratio of

 

                                    Year      Staff to Taxpayers

 

                                    ____      __________________

 

 

      France                        1982           1:173

 

      Ireland                       1984           1:130

 

      Italy                         1978           1:726

 

      Netherlands                   1979           1:280

 

      Portugal                      1986           1:215

 

      Sweden                        1982           1:250

 

      United Kingdom                1983           1:149

 

      United States /a/             1984         1:1,000

 

 

                           FOOTNOTE TO TABLE

 

 

      /a/ Estimate of U.S. Treasury.

 

 

                       END OF FOOTNOTE TO TABLE

 

 

Source: Tait, Alan A. Value-added Tax: international Practice and Problems. Washington, International Monetary Fund, 1988. p. 250.

For fiscal year 1991, the U.S. Internal Revenue Service had operating costs of $6.1 billion and average positions realized of 115,628. 21 For fiscal year 1991, the IRS collected $1,086.9 billion; consequently, operating costs were 0.56 percent of revenue collected. 22

         TABLE 2. Administrative Costs of Value-Added Taxes

 

 

                              Administrative Adminis-    Adminis-

 

                   Adminis-      Costs Per   trative     trative

 

                    trative     Registered  Costs Per   Costs as a

 

                    Costs /a/     Trader   Staff Member  Percentage

 

                   (U.S. $) /b/  (U.S. $)    (U.S. $)   of Revenue /a/

 

                   ___________________________________________________

 

 

  Belgium          $101.7M /i/     $175      $25,686       1.09%

 

  Denmark            57.2M          155       30,106       0.69

 

  Finland            21.3M          235       43,599       0.41

 

  France            224.2M /c/      n.a.      23,353       0.40

 

  Ireland            21.0M          196       28,718       1.08

 

  Italy             147.3M          105       24,544       0.49

 

  Luxembourg          n.a.          n.a.       n.a.        0.99

 

  New Zealand       10.5M /d/        46       10,490       0.49 /e/

 

  Norway             18.9M           67       31,531       0.32

 

  Portugal           16.1M /f/       48       17,870 /g/   1.00 /f/

 

  Sweden             31.IM /h/       68       37,914       0.35

 

  United Kingdom    294.0M          200       30,175       0.95 /j/

 

 

                          FOOTNOTES TO TABLE

 

 

      /a/ 1985 unless otherwise indicated.

 

 

      /b/ At end of 31 December 1986.

 

 

      /c/ Does not include costs of customs authorities.

 

 

      /d/ 1987.

 

 

      /e/ Revenue is 1987-88 estimate taken from "1987 Budget" (NZ

 

 Govt. Printer, Wellington), administrative costs are for 1987.

 

 

      /f/ 1986; does not include costs of customs authorities.

 

 

      /g/ Does not include staff in local tax offices or in tax

 

 control services.

 

 

      /h/ 1988; does not include costs of customs authorities (est.

 

 $19.3M, 1982) costs of collecting the tax (est. $4.2M, 1982), or

 

 costs of the courts (est. $0.73M, 1982).

 

 

      /i/ 1986.

 

 

      /j/ Revenue is for 1985, administrative costs are for 1986.

 

 

      Source: Adapted by CRS from Taxing Consumption. Paris,

 

 Organization for Economic Co-operation and Development, 1988. p. 204.

 

 

                       END OF FOOTNOTES TO TABLE

 

 

Table 2 lists administrative costs of value-added taxes for 12 nations in the OECD. It is difficult to compare administrative costs of a VAT among nations because of differences in tax complexity, quality of administration, standard rate of taxation, and tax compliance. 23

COMPLIANCE

Nations in the OECD have experienced better compliance with their VATs than with either their individual or business income taxes. There are four reasons for this better compliance. First, a VAT collected using the credit-invoice method offers the opportunity to crosscheck returns and invoices. For example, VAT shown on a sales invoice of a wholesaler will appear on the purchase invoice of a retailer. A tax auditor can examine both invoices to cross-check the accuracy of the tax returns of both the wholesaler and the retailer.

Second, each firm has an incentive not to allow suppliers to understate VAT on their sales invoices. A firm is able to credit VAT paid on inputs against VAT collected on sales; consequently, a firm's net VAT liability will increase if VAT shown on its purchase invoices was understated by suppliers.

Third, tax auditors can compare information about a VAT with information about business income taxation which will increase compliance with both types of taxes. For example, the sales revenue figure reported on business income tax forms may be checked for consistency with gross VAT collected as shown on VAT forms. Also, a check of cash receipts during a VAT audit may identify the underreporting of sales. The firm may attempt not only to evade the VAT but also to evade the business income tax. 24 Having a single agency audit the VAT and business incomes taxes promotes efficiency in comparing tax information. Only three nations in the OECD have more than one tax agency. 25

Fourth, some firms legally required to remit VAT may not register. But these firms receive no credit for VAT paid on inputs. Hence, these firms are only partially able to evade the VAT because of the compliance with the VAT by suppliers. This partial taxation of the underground economy by the VAT contrasts with the complete evasion of income taxation by underground firms.

Although compliance with a VAT is higher than the individual or business income tax, the level of compliance has been below initial expectations of tax authorities. As previously discussed, some firms legally required to remit VAT may not register.

Furthermore, firms may evade VAT by altering or omitting information as indicated in the following ten major types of evasion. First, a registered firm may not record resales of goods purchased from unregistered suppliers. Second, a seller of both exempt and taxable goods may divert purchased inputs on which VAT is claimed against taxed sales to help produce and sell exempt goods. Third, a firm may claim credit for purchases that are not creditable. For example, a firm's owner may claim credit for VAT paid on an automobile but then use it for nonbusiness purposes. Fourth, a firm may illegally import goods, charge VAT on their sale, but not report this VAT. Fifth, a firm may simply underreport sales which is the most common type of evasion. Retailers are the most frequent users of this type of evasion. Sixth, a firm may collect VAT on sales and then disappear. This type of evasion is particularly common to small firms in the construction industry. Seventh, in those nations with multiple rates, a firm may illegally reclassify goods into categories with lower tax rates. Eighth, the owners of some small firms, particularly retailers, may consume part of their firms' production but not record their consumption. Ninth, a firm may submit completely false export claims in order to obtain illegal VAT refunds. Tenth, two firms may barter goods in order to evade the VAT. 26

EQUITY

A major topic concerning any proposed tax or tax change is the distribution or equity of the tax among households. There are two types of equity: vertical and horizontal. Vertical equity concerns the tax treatment of households with different abilities to-pay. Horizontal equity concerns the degree to which households with the same ability-to-pay are taxed equally. Both vertical and horizontal equity may be affected by the measure of ability-to-pay and the tax period.

ABILITY-TO-PAY

Some economists argue that personal consumption is the best measure of ability-to-pay because consumption is the actual taking of scarce resources from the economic system. Resources that are consumed could have been used for investment or government purchases. In the past 15 years, the support for consumption as a measure of ability-to-pay has increased.

The most common measure of ability-to-pay is still income. 27 Proponents of income as a measure of ability-to-pay argue that saving yields utility by providing households with greater economic security. Federal data are available on different measures of income. For example, the Federal Government reports levels of disposable income which equals consumption plus saving.

Economists generally prefer a theoretical concept of income called Haig-Simons income which equals consumption plus change in net worth. The Federal Government does not collect data on Haig-Simons income. The U.S. Treasury has used available data to approximate Haig-Simons income with a measure which the U.S. Treasury calls economic income. 28

TIME PERIOD

Tax incidence usually is measured by using a one-year period. Data on consumption and income are readily available in one-year increments and the concept of a one-year period is easily understood. But many economists believe tax incidence is more accurately determined by measuring consumption and income over a household's lifetime. Lifetime income and consumption are affected by the life cycle concept and transitional components of income. According to this life cycle concept, a household makes current consumption decisions based on its expected future flow of income, averaging its consumption over its lifetime.

For example, a common life cycle is low income in the household's early years, high income in the household's middle years, and low income in the household's retirement years. A young household may save a small percentage of its income in order to acquire consumer durables. In its middle years, this household may save a high percentage of its income while its income is highest. Finally, during its retirement years, this household may save a small percentage of its income in order to maintain its consumption level. Thus, annual consumption tends to be more stable than annual income over the household's life cycle.

Although many economists prefer the concept of lifetime income, Federal data are not collected on a lifetime basis. Consequently, economists have developed life-cycle models in an attempt to measure equity, but the distributional results from these models are subject to widespread debate.

VERTICAL EQUITY

If consumption is used as a measure of ability-to-pay, a single- rate VAT with a broad base would be approximately proportional regardless of the time period. In other words, the percentage of consumption paid in VAT by households would be approximately constant as the level of household consumption rises.

If disposable income over a one-year period is the measure of ability-to-pay then a VAT would be viewed as extremely regressive; that is, the percentage of disposable income paid in VAT would decrease rapidly as disposable income increases. In most discussions of tax policy, both a one-year period and annual disposable income (or some other annual income measure) are used; consequently, the VAT is viewed as being extremely regressive.

If disposable income over a lifetime is the measure of ability- to-pay, a VAT would be mildly regressive. For lower and middle income households, it appears that nearly all savings are eventually consumed. 29 Thus, it may be that for the vast majority of households, lifetime consumption and lifetime income are approximately equal. High income households tend to have net savings over their lifetimes; consequently, they would pay a lower proportion of their disposable incomes in VAT than lower income groups.

POLICY OPINIONS TO ALLEVIATE REGRESSIVITY

Some supporters of progressive taxation oppose the VAT primarily because they believe that it is regressive. Some of these critics are especially concerned about the absolute burden of a VAT on low income households. The degree of regressivity, however, can be reduced by Government policy. Three often-mentioned policies are exclusions and multiple rates, income tax credits, and earmarking of some revenues for increased social spending (including indexed transfer payments).

Exclusions and Multiple Rates

The incidence of the VAT depends on its tax base; therefore, the regressivity of the VAT can be reduced or eliminated by excluding (zero-rating or exempting) those goods that account for a disproportionately high percentage of the incomes of lower income households. The exclusion of many necessities on equity grounds from retail sales taxes has been politically popular at the State level. All members of the European Community exclude some goods from VAT on equity grounds. Also, except for Denmark and the United Kingdom, all EC nations have multiple tax rates on equity grounds. Reduced rates are applied to necessities and premium rates are levied on luxuries.

Despite the existing policies in the EC, most tax economists oppose exclusions and multiples rates to reduce regressivity for three reasons. First, the administrative costs, compliance costs, and neutrality costs are very high. If a VAT is to raise a given amount of revenue, then revenue lost from excluding goods must be offset by higher VAT rates. These higher rates increase the distortion in relative prices, and consequently, reduce the neutrality of the tax system. Second, the possible reduction in regressivity from exclusion and multiple rates is declining because consumption patterns for different income levels are becoming more similar. 30 Third, for a one-year time period, the reduction in regressivity is limited, particularly for low income households. Money saved for exclusions is largely offset by higher tax rates (needed for revenue neutrality) on taxed goods. 31

In 1980, economists from six European nations discussed the experiences of their nations with the value-added tax at a conference sponsored by the Brookings Institution. These economists wrote papers about their nations' experiences with the VAT. After editing these papers, Henry J. Aaron, a Senior Fellow at Brookings, concluded that

European experience with the value-added tax proves that it is possible to convert a tax that in its simplest form is proportional with respect to consumption and regressive with respect to income into a tax that is progressive with respect to consumption and proportional or slightly progressive with respect to income. The use of different rates for different classes of goods and services and of zero rating and exemptions is the mechanism for achieving this goal.

Participants at the conference agreed that the use of multiple rates and especially of exemptions complicates administration and compliance and distorts consumption in ways that are unlikely to promote economic efficiency. Most conference participants agreed that these disadvantages outweighed any gains from reduced regressivity. They held that distributional objectives should be sought with other instruments, notably income taxes and direct transfers. 32

The EC has recognized the advantages of a single rate and a broad base for a VAT. The EC has agreed to harmonize its value-added taxes by 1993. The Commission of the European Communities believes that a single rate for the entire EC would be too drastic a change to be feasible. 33 Therefore, beginning January 1, 1993, the economic and finance ministers of the EC have agreed that throughout the EC there will be a minimum VAT rate of 15 percent but no maximum standard VAT rate. 34 Furthermore, the EC ministers agreed on a minimum reduced VAT rate of 5 percent on a list of products. 35 Also, in the OECD nations, there is a trend towards fewer rates and a broader base. 36

Credit

The Federal Government could allow either a flat credit or a credit that diminishes as income rises in order to overcome the regressivity of a VAT. This credit method could be operated in two different ways. First, an individual could apply the credit against his Federal income tax liability and thus lower his liability on a dollar-for-dollar basis. If the tax credit exceeded the individual's tax liability, he could apply for a refund of the excess credit. A taxpayer already due a tax refund could increase the size of his refund by the amount of the tax credit. A household not subject to income taxation could apply for a tax refund equal to the credit. An income tax credit that declines as income increases could reduce regressivity more sharply than a flat income tax credit.

Second, a stand-alone credit system could be established which would not require an eligible household to file an income tax return in order to obtain a refund for VAT paid. An eligible household would have to submit a simple form in order to receive a refund. A stand- alone credit system may be more effective than the income tax credit in encouraging low income households to file for a refund, but administrative and compliance costs would be higher.

A study by Brashares, Speyrer, and Carlson concluded that

. . . a system of reimbursements to low income individuals and families for value-added tax paid targets the most needy groups with comprehensive relief from the tax without requiring high value-added rates. These reimbursements, when combined with the automatic indexation of transfers, almost completely relieve the burden on those in the lowest income category and may, in fact, overcompensate some families. 37

An examination of sales tax credits at the State level may yield some implications for a credit against a Federal VAT. At the State level, many eligible poor people have not filed for their State income tax refunds resulting from the sales tax credit. At the Federal level, the refundable earned income tax credit is not claimed by many eligible poor.

At the State level, tax administrators generally prefer the income tax credit over exempting food from the retail sales tax. 38 But the general public may favor the food exemption over the income tax credit. As of January 1982, 25 out of 45 States with the sales tax exempted all, or almost all, food. 39 Only seven States have an income tax credit for their sales taxes. These States are Hawaii, Idaho, Kansas, New Mexico, South Carolina, Vermont, and Wyoming. 40 In the early 1980s, Massachusetts and Nebraska canceled their credits against their sales taxes. 41

Earmarking of VAT Revenues

A third option to reduce or eliminate regressivity is to earmark some of the revenue from a VAT to finance an increase in income tested transfers. Aaron estimates that an increase in benefits of approximately $5 billion for a VAT yielding $100 billion could fully protect low-income families from paying the VAT. 42

For example, a 10-percent increase in food stamp entitlements would approximately offset the effect on households eligible for the full food stamp allotment of a VAT that raised $100 billion in revenue. This estimate is based on the fact that $100 billion will be approximately three percent of consumption in 1989 and that food is estimated to absorb about 30 percent of the budget in estimates of poverty thresholds. 43

Most households with low taxable incomes do not currently receive transfers and would not be protected by Aaron's scheme.

HORIZONTAL EQUITY

If consumption is the measure of ability-to-pay, a single-rate VAT with a broad base would be horizontally equitable for either a one-year period or a lifetime period. Households with the same level of consumption would pay approximately the same VAT at all levels of consumption.

If disposable income is the measure of ability-to-pay, the horizontal equity of a VAT would depend on the time period. For a one-year period, a VAT would be very inequitable because households with the same level of disposable income would have widely differing levels of consumption, and, consequently, payments of VAT.

For a lifetime period, the VAT would have a high degree of horizontal equity. For low- and middle-income households, almost all income is consumed over these households' lifetimes; consequently, households with the same lifetime incomes would have the same levels of consumption and the same VAT payments. 44 Over their lifetimes, high income households with equal incomes differ in their levels of consumption, and, consequently, VAT payments. Thus, the VAT is not horizontally equitable for high income households.

NEUTRALITY

In public finance, the more NEUTRAL is a tax, the less the tax affects private economic decisions; and, consequently, the more efficient is the operation of the economy. Conceptually, a VAT on all consumption expenditures with a single rate that is constant over time would be relatively neutral compared to other major revenue sources.

For households, two out of three major decisions would not be altered by this hypothetical VAT. First, this VAT would not alter choices among goods because all would be taxed at the same rate. Thus, relative prices would not change. In contrast, other taxes, such as excise taxes, which change relative prices, would distort household consumer choices by encouraging the substitution of untaxed goods for taxed goods.

Second, a VAT would not affect the saving-consumption decision because saving would only be taxed once; that is, when savings are spent on consumption. In contrast, the individual income tax affects the saving-consumption decision by taxing saving twice. The income tax is levied on income which is saved, and then the returns on saving are taxed. Thus, an increase in the individual income tax would tax saving more heavily than consumption.

Third, a household's work-leisure decision would be affected by a VAT. Leisure would not be taxed, but the returns from work would be taxed when spent on goods. A VAT would have conflicting effects on the number of hours worked by each household. A household would have an incentive to substitute leisure for work because of the relative rise in the value of leisure to work (substitution effect). Conversely, a household would have an incentive to increase its hours worked in an attempt to maintain its current living standards (income effect). Thus, a VAT could decrease, increase, or not change a household's hours worked.

For a firm, the VAT would not affect decisions concerning method of financing (debt or equity), choice among inputs (unless some suppliers are exempt or zero-rated), type of business organization (corporation, partnership, or sole proprietorship), and goods to produce. Other types of taxes may affect one or more of these types of decisions.

But a VAT cannot be levied on all consumer goods; consequently, prices of taxed goods will rise relative to untaxed goods. Furthermore, most nations with VATs have more than one rate. 45 Multiple VAT rates alter relative prices of taxed goods. Finally, VAT rates in most nations have tended to rise over time. Despite these deviations from a pure form of VAT, a broad-based VAT is relatively neutral. This neutrality is greater if the tax rate is relatively low, as could be the case for a VAT to reduce the U.S. deficit.

NATIONAL SAVING

NATIONAL SAVING consists of government saving, business saving, and personal saving. A VAT or any other tax that reduces the budget deficit would be expected to reduce government dissaving, and, consequently, raise national saving. 46

A second issue concerns the effect on the personal savings rate of levying a VAT compared to increasing income taxes. A VAT taxes savings when they are spent on consumption, allowing savings to compound at a pre-tax rate. But an income tax is levied on all income at the time it is earned, regardless of whether the income is consumed or saved. The income tax is also levied on the earnings from income saved. Consequently, some proponents of the VAT have argued that choosing a VAT rather than an income tax to raise revenue would increase the return from saving, and, consequently, raise the savings rate.

The rate of return on savings, however, has never been shown to have a significant effect on the savings rate because of two conflicting effects. First, each dollar saved today results in the possibility of a higher amount of consumption in the future. This relative increase in the return from saving causes a household to want to substitute saving for consumption out of current income (substitution effect).

But a higher rate of return on savings raises a household's income; consequently, the household has to save less to accumulate some target amount of savings in the future (income effect). Thus, this income effect encourages households to have higher current consumption and lower current saving.

A CRS study compared the long-run effects on the capital stock and consumption of a $60 billion VAT and a $60 billion increase in individual income taxes. This study's results suggest that selecting a VAT instead of an increase in individual income taxes would raise the capital stock by less than two percent and consumption by only a quarter to a third of a percent after 50 years. 47

An empirical study by the Congressional Budget Office (CBO) analyzed the economic effects of replacing a quarter of the current income tax with a 6 percent VAT on all consumption. CBO estimated that this tax substitution would, in the long-run, increase the saving rate by 0.5 percent, raise the capital stock by 7.9 percent, increase output by 1.5 percent, and raise consumption by 1.2 percent. 48 These CBO findings of only slight economic effects in the long-run are consistent with the estimates of the CRS study.

INFLATION

A VAT initially would cause a one-time increase in the price level, if the Federal Reserve implemented an expansionary monetary policy to offset the contractionary effects of the tax. For example, a four percent VAT on 75 percent of consumer outlays might directly cause an estimated one-time increase in consumer prices of approximately three percent. A VAT would also have some secondary price effects. Some goods would rise in price because their factors of production, especially labor, are linked to price indexes. Yet, if the Federal Reserve disregarded these secondary price increases in formulating monetary policy, these secondary price increases would tend to be offset by price reductions in other sectors of the economy.

An examination of VATs in the OECD have found only an initial effect of a VAT on the price level. But it is difficult to empirically isolate the effect of a VAT from other possible causes of a change in the price level.

It has been suggested that the Federal Government exclude the VAT from price indexes. Hence, existing indexing would not have an inflationary effect. 49 But this proposal would be unpopular and could be contested in court.

In summary, a VAT would probably cause a one-time increase in the price level but not affect the subsequent rate of inflation, i.e., cause continual increases in the general price level.

BALANCE-OF-TRADE

Currently, all nations with VATs zero-rate exports and impose their VATs on imports. This procedure for taxing trade flows is referred to as the destination principle because a commodity is taxed at the location of consumption rather than production. An alternative would be to apply the origin principle by having all nations levy their VATs on exports but not imports. All experts on the VAT recommend that nations adopting a VAT use the destination principle in order to be consistent with existing practices of other countries.

The destination principle creates a level playing field because imported commodities rise in price by the percentage of the VAT, but exported commodities do not increase in price. For a particular nation, the VAT rate on domestically produced and consumed products would be the same. The VAT rate on a particular good would vary among nations.

A simple example demonstrates this concept of a level playing field. Assume nation A has a 10 percent VAT and nation B has a 20 percent VAT. Exports from nation A to nation B will not be taxed by nation A. But nation B will levy a 20 percent VAT on imports from nation A. Thus, consumers in nation B will pay a 20 percent VAT regardless of whether or not their purchased goods were domestically produced or imported. Furthermore, exports from nation B to nation A will not be taxed by nation B. Nation A will levy a 10 percent VAT on imports. Hence, consumers in nation A will pay a 10 percent VAT on both domestically produced and imported commodities.

In 1962, the rules applicable to taxation were included in the General Agreement on Tariffs and Trade (GATT). Under these GATT rules, indirect taxes were rebatable on exports but direct taxes were not rebatable. Taxes which are not shifted but borne by the economic entity on which they are levied are classified as direct taxes. From 1962 through 1972, a fixed exchange rate system prevailed and the United States ran deficits in its balance-of-payments. U.S. officials complained that the GATT rules favored nations with VATs because their exports were zero-rated. In contrast, corporate income taxes were not rebated on exports.

In early 1973, the United States and its major trading partners formally shifted to a flexible exchange rate system. Under this system, the supply and demand for different currencies determine their relative value. If a nation has a deficit in its balance-of- payments, its currency will tend to decline in value relative to the currencies of other nations. Thus, U.S. officials ended their complaints about the effects of GATT tax rules on international trade.

Since early 1973 there have been periods when exchange rates have been "managed" by mutual agreement among governments. Central banks have coordinated purchases and sales of different currencies in order to stabilize their relative values to promote international economic stability.

Even if there were a fixed exchange rate, a U.S. VAT would have slight impact on the balance-of-trade because the proposed VAT rate of 5 percent or less is a low tax rate. During the past six years the value of the dollar has fallen by over 40 percent relative to an index of major currencies, yet a serious U.S. balance-of-trade deficit persists. In summary, a U.S. VAT offers no major advantage over other major tax increases in reducing the U.S. balance-of-trade deficit.

Any large U.S. tax increase which reduces the Federal deficit could reduce the U.S. balance-of-trade deficit. The U.S. Treasury would reduce its borrowing on financial markets; interest rates would decline; and foreign capital would flow out of the United States. This capital outflow would reduce the demand for dollars relative to other currencies. This decline in the value of the dollar would raise exports, reduce imports, and, consequently, reduce the U.S. balance- of-trade deficit.

SIZE OF GOVERNMENT 50

In the public policy debate over a VAT, one of the more divisive issues concerns the size of the public sector. There is widespread debate among economists and public policy experts concerning the variables that determine the size of government. These variables include urbanization, the growth of income, the age distribution of the population, technological change, relative costs of public services, social philosophy, rates of voter turnout, perceived need for defense spending, tax structure, and the size of a nation. 51

It can be argued that a VAT is a "money machine" because the high revenue yield per one percent levied allows the government to finance a growing public sector by periodically raising the VAT rate. Furthermore, it can be argued that the VAT is a partially "hidden" tax because consumers pay a small amount of VAT with each purchase and are not fully cognizant of the aggregate VAT paid for a year. Furthermore, the tax authorities can prohibit the VAT from being shown on retail sales slips.

But it can be argued that the tax rate for any tax can be increased at the margin. There is no proof that taxpayers are any less cognizant of a tax paid in small amounts than in one lump sum. Tax authorities can require that the VAT be shown on retail sales slips. OECD nations with VATs have larger public sectors, on average, than nations without VATs, but this was also true before these nations approved their VATs. Some empirical studies have found that tax increases lead to increased spending, but other empirical studies have found that public demands for a larger public sector lead to tax increases. Hence, empirical studies are inconclusive concerning whether or not the passage of a VAT will increase the size of the public sector.

INTERGOVERNMENTAL ISSUES

Six of the 24 OECD nations including the United States, have federal systems of government. For the United States, a Federal VAT raises two primary intergovernmental issues: the Federal encroachment on the State sales tax and the joint collection of a VAT. 52

ENCROACHMENT ON A STATE TAX SOURCE

It has been claimed that broad-based consumption taxation has traditionally been a State source of revenue while income taxation has been a Federal revenue source; consequently, a Federal VAT would encroach on the primary source of tax revenue for the States.

No constitutional restriction prevents the Federal Government from levying a VAT. Precedents exist for the Federal Government to levy a new tax that many States already levy. For example, the Federal Government levied death taxes and personal income taxes after many States had already imposed them. Also, both the Federal Government and the States impose many of the same excise taxes.

The Federal Government relies primarily on income taxes (table H1 of appendix H), but taxation of income by States has risen steadily over the years (table G1 of appendix G). For fiscal year 1990, 32.0 percent of State tax collections consisted of individual income taxes and 7.2 percent consisted of corporation income taxes. Total State taxes on income accounted for 39.2 percent of all taxes collected compared to only 33.2 percent collected from general sales taxation (including use taxes and gross receipts taxes). Hence, it can be argued that the States have encroached on the primary source of revenue of the Federal Government.

States could continue to levy their retail sales taxes while the Federal Government levies a VAT. The combined total of State (and local) sales taxes and a five percent VAT would be less than the standard VAT rate for most developed nations. In Canada, the federal government levies a VAT, and the provinces continue to collect their retail sales taxes.

JOINT COLLECTION

States could piggy-back on a Federal VAT. States would have to replace their retail sales taxes with a VAT and adopt the Federal tax base. Because a Federal VAT would probably have a broader base than any State sales tax, more revenue would be yielded for each one percent levied. Also, the broader VAT base would reduce economic distortions. A joint Federal-State VAT would eliminate duplication of administrative effort, permit the taxation of interstate mail order sales, and lower total compliance costs of firms. 53

But, States may refuse to piggy back because of their desire to maintain greater fiscal independence from the Federal Government. In 1962, Federal legislation permitted States to adopt the Federal individual income tax base and have the Federal Government collect their State income tax. No State has yet delegated collection of their income tax to the Federal Government.

PUBLIC OPINION

Public opinion polls on a VAT for the United States have been limited. The public has been questioned, however, about a national sales tax (NST) and an increase in individual income taxes. A NST and a VAT are both broad-based consumption taxes with similar economic effects. The mass media sometimes refers to the VAT as a form of a NST. Hence, this section of the report assumes that public opinion towards a VAT would be the same as public opinion has been towards a NST.

Three opinion polls were selected for discussion in this report. First, a poll conducted for the Advisory Commission on Intergovernmental Relations (ACIR) has a detailed breakdown by demographic characteristics and individuals were asked to choose between an increase in individual income taxes and a NST on all purchases other than food. The two other polls, a Media General/Associated Press Poll and a Harris Poll, were selected because they are current and were conducted by different polling organizations.

Data from these surveys are shown in appendix I. These data suggest a public preference for a VAT over an increase in individual income taxes. Demographic characteristics have only a slight influence on this preference.

APPENDIX A: CREDIT-INVOICE, SUBTRACTION, AND ADDITION METHODS

This appendix shows numerical examples of the three methods of calculating a VAT: credit-invoice, subtraction, and addition methods. The tax rate for a VAT may be price inclusive (included in the sales price) or price exclusive (added to the sales price). Currently all developed nations except Finland and Sweden levy their VAT rates on a price exclusive basis. 54

The CREDIT-INVOICE METHOD of calculating a VAT is demonstrated in table A1. The rate for the value-added tax is assumed to be 10 percent on a price-exclusive basis. The product manufactured and sold is a widget. The production of widgets involves firms at four different stages of production: raw material producer, manufacturer, wholesaler, and retailer. The operating assumption is that the VAT is fully shifted forward to the next stage of production; consequently, the consumer pays the entire VAT. The seller indicates the amount of VAT on each sales invoice.

At the first stage of production, the simplifying assumption is made that the raw material producer provides all of his own inputs. The raw material producer has sales of $200 plus VAT on sales of $20 (10 percent of $200). Sales plus VAT equal $220 ($200 + $20). Because the raw material producer purchased no inputs, he receives no credit for prior VAT paid. Hence, the raw material producer remits $20 to the government.

At the second stage of production, the manufacturer has sales of $500 plus VAT on sales of $50 (10 percent of $500) which is shown separately on the sales invoice. Sales plus VAT equal $550 ($500 + $50). The manufacturer purchased $200 in raw material plus $20 was paid in VAT as listed on the purchase invoice. The manufacturer credits the $20 paid in VAT on inputs against the $50 in VAT collected on sales and remits the difference of $30 to the government.

At the third stage of production, the wholesaler has sales of $750 and adds a VAT of $75 (10 percent of $750). Sales plus VAT equal $825 ($750 + $75). The wholesaler purchased inputs for $500 and paid an additional $50 in VAT. Consequently, the wholesaler credits $50 in VAT paid on inputs against $75 in VAT collected on sales and remits $25 in VAT to the government.

Finally, the retailer has sales of $1,000 and adds VAT of $100 (10 percent of $1,000). Sales plus VAT equal $1,100 ($1,000 + $100). The retailer purchased $750 in inputs and paid an additional $75 in VAT. The retailer credits the $75 in VAT paid on inputs against the $100 in VAT collected on sales and remits $25 to the government.

The VAT remitted by the four firms was $100. The consumer paid $100 in VAT on top of $1,000 in retail sales. The last line of figures in table A1 indicates the value added at each stage of production. The sum of all firms' value added is $1,000, which equals the sales price of the exclusive of VAT.

                    TABLE A1. Credit-Invoice Method

 

                (Data in U.S. dollars, price-exclusive

 

                    VAT rate assumed at 10 percent)

 

 

                               Stage of Production of Widgets

 

                  ___________________________________________________

 

 

                  Raw Material   Manu-    Whole-            Total VAT

 

 Transaction       Produce /a/  facturer  saler   Retailer   Remitted

 

 ____________________________________________________________________

 

 

 Sales (Excluding

 

   VAT)               $200      $500      $750      $1,000

 

 VAT on Sales               20        50        75         100

 

 Purchases of Inputs

 

   (Excluding VAT)       0       200       500         750

 

 VAT on Inputs           0        20        50          75

 

  Credit, VAT on

 

  Inputs                    -0       -20       -50         -75

 

  VAT to be         __________________________________________

 

   Remitted                 20        30        25          25   100

 

 Value Added               200       300       250     250

 

 

                           FOOTNOTE TO TABLE

 

 

      /a/ As a simplification, the raw material producer is assumed to

 

 provide all of his inputs.

 

 

                       END OF FOOTNOTE TO TABLE

 

 

      The SUBTRACTION METHOD is demonstrated in table A2. In order to

 

 simplify a comparison with figures in table A1, a tax inclusive VAT

 

 rate of 9.091 percent is assumed. This tax inclusive rate is

 

 equivalent to a tax exclusive rate of 10 percent.

 

 

                     TABLE A2. Subtraction Method

 

 

                (Data in U.S. dollars, price-inclusive

 

                  VAT rate assumed at 9.091 percent)

 

 

                                Stage of Production of Widgets

 

                      _________________________________________________

 

                      Raw Material  Manu-     Whole-          Total VAT

 

 Transaction           Produce /a/  facturer  saler  Retailer  Remitted

 

 ______________________________________________________________________

 

 

 Sales (Including VAT)      $220      $550     $825   $1,100

 

 Purchases

 

  (Including VAT)              0       220      550      825

 

                             _______________________________

 

 VAT Base                    220       330      275      275

 

  VAT to be Remitted          20        30       25       25      100

 

 

                           FOOTNOTE TO TABLE

 

 

      /a/ As a simplification, the raw material producer is assumed to

 

 provide all f his inputs.

 

 

                       END OF FOOTNOTE TO TABLE

 

 

The raw material producer has sales including VAT of $220. Because he has no purchases of inputs, his VAT base (sales including VAT less purchases of inputs) is $220. His VAT to be remitted is $20 (9.091 percent of $220).

The manufacturer has sales including VAT of $550 and purchases including VAT of $220. His VAT base is $330 ($550 less $220). His VAT to be remitted is $30 (9.091 percent of $330).

The wholesaler has sales including VAT of $825 and purchases including VAT of $550. His VAT base is $275 ($825 less $550). His VAT to be remitted is $25 (9.091 percent of $275).

Lastly, the retailer has sales including VAT of $1,100, purchases including VAT of $825, and his VAT base is $275 ($1,100 less $825). He remits VAT of $25 (9.091 percent of $275). The total VAT remitted to the government by all four firms is $100 ($20 + $30 + $25 + $25). This $100 in VAT equals 9.091 percent of $1,100.

The ADDITION METHOD is shown in table A3. The raw material producer calculates his value added by adding all payments for factors of production which the firm owned and applied to the production process. Thus, the raw material producer had value added of $200 (wages of $100, rent of $50, interest of $30, and profit of $20). Next, the raw material producer calculates his VAT by multiplying his value added by the tax rate. Thus, the raw material producer must remit $20 ($200 x 0.1) to the Government. This procedure applies to all other stages of production and total VAT remitted is $100.

                       TABLE A3. Addition Method

 

        (Data in U.S. dollars, VAT rate assumed at 10 percent)

 

 

 ____________________________________________________________________

 

 Return on

 

 Factors of      Raw Material   Manu-       Whole-              Total

 

 VAT

 

 Production      Produce /a/    facturer    saler    Retailer

 

 Remitted

 

 ____________________________________________________________________

 

 

 Wages              $100         $150       $110        $80

 

 Rent                 50          100         90        115

 

 Interest             30           25         35         30

 

 Profit               20           25         15         25

 

                     ___          ___        ___        ___

 

 Value added         200          300        250        250

 

 

 Value-added Tax         20           30         25         25    100

 

 

                           FOOTNOTE TO TABLE

 

 

      /a/ As a simplification, the raw material producer is assumed to

 

 provide all of his inputs.

 

 

                       END OF FOOTNOTE TO TABLE

 

 

        APPENDIX B. ECONOMIC EFFECTS OF A SPECIAL VAT TREATMENT

 

 

         TABLE B1. Economic Effects of a Special VAT Treatment

 

 

 ____________________________________________________________________

 

 

 Special VAT   Break in Chain    Price of Commodity      Total VAT

 

 Treatment     of VAT Credits         Plus VAT            Remitted

 

 ____________________________________________________________________

 

 

 Exempt             No          Decline Equal            Decline

 

 Retailer                       to a Fraction

 

                                of Initial VAT

 

 

 Zero-rated         No          Decline Equal to         Decline

 

 Retailer                       Eliminated VAT (VAT Eliminated)

 

 

 Exempt             Yes              Rise                  Rise

 

 Manufacturer

 

 

 Zero-rated         Yes            No Change            No Change

 

 Manufacturer

 

 ____________________________________________________________________

 

 

      Source: Revised excerpt from table 1 in U.S. Library of

 

 Congress. Congressional Research Service. Economic Effects of a VAT

 

 on Small Business. Report No. 88-288 E, by James M. Bickley.

 

 Washington, 1988. p. 7.

 

 

APPENDICES C THROUGH H IS NOT SUITABLE FOR ON-LINE PRESENTATION.

APPENDIX I: SURVEYS OF PUBLIC OPINION

ACIR SURVEY

The Advisory Commission on Intergovernmental Relations contracted with Gallup to survey the public on the following question: "If the Federal Government had to raise taxes substantially, which would be a better way to do it?" 55 The three possible responses were: (1) increasing individual income taxes; (2) a new national sales tax on all purchases other than food; and (3) don't know. 56 This survey may be particularly relevant since the choice for a Federal tax increase may be between a value-added tax and higher Federal income taxes.

From April 29 through May 2, 1983, personal interviews were conducted in the homes of a sample of 1,517 men and women 18 years and over. The results were weighted using demographic factors so that they could be projected to the total adult civilian population. The survey results are accurate within a three percent margin of error at a 95 percent level of confidence. 57

Data in table I1 show both aggregate results and detailed results based on demographic factors. For the total public, 24 percent favored increasing individual income taxes, 52 percent favored a new national sales tax on all purchases other than food, and 25 percent did not know. Regardless of the demographic characteristics considered, a statistically significant percent of respondents preferred a new national sales tax over an increase in individual income taxes with a substantial proportion not knowing. The demographic characteristics considered were sex, head of household, age, level of education, household income, home ownership status, race, employment status, occupation, marital status, household size, children in household, region, and nonmetro/metro status. 68

The ACIR survey is the only survey in which the public was asked to only select between increasing individual income taxes and establishing a new national sales tax (on all purchases other than food). The ACIR survey also has a detailed breakdown of public opinion by characteristics of households. But the ACIR survey occurred in 1983, and public opinion may change over time.

 TABLE I1. If the Federal Government Had to Raise Taxes Substantially,

 

          Which Would Be a Better Way to Do It? (in percent)

 

 

                          Increasing   A New National Sales

 

                          Individual   Tax on All Purchases

 

                         Income Taxes   Other than Food     Don't Know

 

                         _____________________________________________

 

 

 Total Public                 24                52               25

 

 Male                         25                53               22

 

 Female                       23                51               27

 

 Head of Household            24                51               25

 

  Male Head                   27                52               22

 

  Female Head                 22                51               27

 

 Under 35 Years of Age        26                52               22

 

  18-24                       24                56               20

 

  25-34                       27                49               24

 

  35-44                       22                56               23

 

  45-65                       24                52               24

 

 Over 65                      21                44               35

 

 High School Incomplete       19                47               35

 

 High School Graduate         22                55               23

 

 College Incomplete           26                59               15

 

 College Graduate             37                46               17

 

 Household Income

 

 Under $15K                   22                47               32

 

 $15-24.9K                    23                54               23

 

 $25K+                        28                58               15

 

 $25-29.9K                    29                55               16

 

 $30-39.9K                    28                60               12

 

 $40K+                        26                58               17

 

 Own                          23                54               22

 

 Rent                         25                45               30

 

 White                        25                52               23

 

 Nonwhite                     16                49               36

 

 Employed                     27                53               20

 

 Employed Female              30                49               21

 

 Not Employed                 20                50               30

 

 Not Employed Female          18                52               30

 

 Prof. Manager, Owner         29                53               18

 

 White Collar, Sales,

 

   Clerical                   28                52               20

 

 Blue Collar                  20                55               25

 

 Retired                      27                44               30

 

 Married                      25                54               22

 

 Not Married                  23                48               29

 

 Household

 

 1-2 People                   25                50               26

 

 3A People                    25                53               22

 

 5+ People                    21                54               26

 

 Children in Household

 

 Children under 18            22                54               24

 

 No Children                  25                50               25

 

 Northeast                    31                40               29

 

 North-Central                21                58               21

 

 South                        21                55               24

 

 West                         24                52               25

 

 Nonmetro                     21                57               22

 

 Metro 50,000 and Over

 

 Fringe                       27                50               23

 

  Central City                25                46               30

 

 

      Source: Advisory Commission on Intergovernmental Relations.

 

 Changing Public Attitudes on Governments and Taxes. Washington, 1983.

 

 p. 9.

 

 

MEDIA GENERAL/ASSOCIATED PRESS POLL

Between November 10 and November 20, 1988, Media General Research conducted a public opinion poll for Media General/Associated Press. A representative sample of 1,084 adults were called by telephone from listed and nonlisted telephones. Men accounted for 48 percent of the sample and women for 52 percent. 59

The sample was asked the following question:

Here are some possible ways for the Government to raise money to reduce the Federal budget deficit. For each, please tell me whether you support or oppose it.

The public's responses concerning a national sales tax and higher personal income taxes were 60

             TABLE I2. Tax Increases to Reduce the Deficit

 

 

                                                          Don't Know

 

                                 Support     Oppose         Or No

 

 

 Answer

 

 ____________________________________________________________________

 

 

 A National Sales Tax              29%          64%           7%

 

 Higher Personal Income Taxes      15%          80%           4%

 

 ____________________________________________________________________

 

 

      Source: Media General/Associated Press Poll. Richmond, Media

 

 General, November 20, 1988. p. 2.

 

 

Thus, this poll found that the public support for a NST was approximately double that of an increase in personal income taxes, although both taxes were opposed.

THE HARRIS POLL

Between December 2 and 6, 1988, a Harris Poll was conducted by telephone using a nationwide sample of 1,248 adults. The results of a poll this size have a 95 percent probability of being within three percent of the opinions of the entire adult population. 61

The nationwide sample was asked the following question:

Now let me ask you about specific tax increases that some people feel are necessary to balance the Federal budget and end deficit spending. In each case, the Congress would pass a tax increase that would make sure none of the money raised from added taxes would be used for additional spending. Instead, all of the new tax money would have to be used to reduce the Federal deficit. This tax would be in effect for only three years. If (read specific tax) combined with spending reductions would eliminate the Federal deficit in three years, would you favor or oppose that tax? 62

The sample's answers to this question for a national sales tax or a 10 percent surcharge on Federal income taxes are shown in table I3. Individuals favored a NST over an income tax surcharge by approximately a two to one margin. This approximately two to one margin also existed for those individuals who voted for Bush and those who voted for Dukakis. 63

         TABLE I3. Tax Increases to Balance the Federal Budget

 

 

                                 Favor       Oppose       Not Sure

 

 ____________________________________________________________________

 

 

 A National Sales Tax

 

      Total                       47%          50%           3%

 

      Voted for Bush in 1988      52%          45%           3%

 

      Voted for Dukakis in 1988   44%          54%           2%

 

 

 A 10 percent surcharge on

 

  Federal Income Taxes

 

      Total                       24%          71%           5%

 

      Voted for Bush in 1988      27%          68%           5%

 

      Voted for Dukakis in 1988   23%          73%           4%

 

 ____________________________________________________________________

 

      Source: The Harris Poll. Creators Syndicator, Inc. Los Angeles,

 

 January 8, 1989. p. 2.

 

 

SELECTED BIBLIOGRAPHY

Aaron, Henry J. The political economy of a value-added tax in the

 

     United States. Tax notes, v. 38, no. 10, March 7, 1988: 1,111-

 

     1,115.

 

 

___ , ed. The value-added tax: lessons from Europe. Washington, The

 

     Brookings Institution, 1981. 107 p.

 

 

___ . The value--added tax: sorting through the practical and

 

     political problems The Brookings review, v. 6, summer 1988: 10-

 

     16.

 

 

Advisory Commission on Intergovernmental Relations. Changing public

 

     attitudes on government and taxes. Washington, 1983. 59 p.

 

 

Brashares, Edith, Janet Furman Speyrer, and George N. Carlson.

 

     Distributional aspects of a Federal value-added tax. National

 

     tax journal, v. 41, no. 2, June 1988: 155-173.

 

 

Center for Co-operation with European Economics in Transition. The

 

     role of tax reform in center and Eastern European economies.

 

     Paris, Organization for Economic Co-operation and Development,

 

     1991. 458 p.

 

 

Cnossen, Sijbren. Key questions in considering a value-added tax for

 

     Central and Eastern European countries. IMF staff papers, v. 39,

 

     no. 2, June 1992: 211-255.

 

 

___. The value-added tax: questions and answers. Tax notes, v. 42,

 

     no. 2, January 9, 1989: 209-213.

 

 

Due, John F. Some unresolved issues in design and implementation of

 

     value--added taxes. National tax journal, v. 43, no. 4,

 

     December, 1990: 383-394.

 

 

___. and John L. Mikesell. Sales taxation: State and local structure

 

     and administration. Baltimore, Johns Hopkins University Press,

 

     1983. 350 p.

 

 

EC finance ministers adopt directives harmonizing VAT, excise duties.

 

     Daily tax report, no. 204, October 21, 1992: G2.

 

 

Focus on the value-added tax. Washington, Coopers & Lybrand, 1986.

 

     34 p.

 

 

Gillis, Malcolm, Carl S. Shoup, and Gerardo P. Sicat, eds. Value--

 

     added taxation in developing countries. Washington, World Bank,

 

     1990. 237 p.

 

 

Harris Poll. Los Angeles, Creators Syndicator, Inc., January 8, 1989.

 

     2 p.

 

 

Kotlikoff, Laurence J. Intergenerational transfers and savings.

 

     Journal of Economic perspectives, v. 2, no. 2, spring 1988: 41-

 

     58.

 

 

McLure, Charles, Jr. The value-added tax: key to deficit reduction?

 

     Washington, American Enterprise Institute for Public Policy

 

     Research, 1987. 184 p.

 

 

Media General/Associated Press Poll. Richmond, Media General,

 

     November 20, 1988. 5 p.

 

 

Modigliani, Franco. The role of intergenerational transfers and life

 

     cycle saving in the accumulation of wealth. Journal of economic

 

     perspectives, v. 2, no. 2, spring 1988: 15-40.

 

 

Musgrave, Richard A., and Peggy B. Musgrave. Public finance in theory

 

     and practice. 4th ed. New York, McGraw-Hill, 1984. 824 p.

 

 

Rivlin, Alice M. Reviving the American dream. Washington, The

 

     Brookings Institution, 1992. 196 p.

 

 

Rose, Harold. The question of saving. London, British-North American

 

     Committee, 1991. 53 p.

 

 

Tait, Alan A. Value-added tax: international practice and problems.

 

     Washington, International Monetary Fund, 1988. 450 p.

 

 

Tax Foundation Inc. Facts and figures on government finance. 27th ed.

 

     Washington, 1992. 359 p.

 

 

Taxing consumption. Paris, Organization for Economic Co-operation and

 

     Development, 1988. 335 p.

 

 

Turner, William J. Designing an efficient value-added tax. Tax law

 

     review, v. 39, no. 2, summer 1984: 435-472.

 

 

____ VAT: minimizing administrative and compliance costs. Tax notes,

 

     v. 38, no. 11, March 14, 1988: 1257-1268.

 

 

U.S. Congress. Joint Committee on Taxation. Description of tax bills:

 

     S. 353 (Educational Savings Bond); S. 442 (Value-Added Tax); S.

 

     659, S. 838, S. 849 (Estate Freezer); and S. 800 (Moratorium on

 

     Certain State Tax Laws). Washington, U.S. Govt. Print. Off.,

 

     1989. p. 1-2, 6-31.

 

 

U.S. Congressional Budget Office. Effects of adopting a value-added

 

     tax. Washington, February 1992. 79 p.

 

 

U.S. Department of the Treasury. Office of the Secretary. Tax reform

 

     for fairness, simplicity, and economic growth. v. 3, value-added

 

     tax. [Washington] November 1984. 128 p.

 

 

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     necessary to avert long-term damage to the economy. Washington,

 

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___ State tax officials have concerns about a Federal consumption

 

     tax. Washington, March 1990. 77 p.

 

 

U.S. Library of Congress. Congressional Research Service. A value-

 

     added tax contrasted with a national sales tax, by James M.

 

     Bickley. [Washington] 1992. (Updated regularly)

 

          CRS Issue Brief No. IB92069

 

 

___ Economic effects of a value-added tax on capital formation, by

 

     Jane G. Gravelle. [Washington] 1988. 14 p.

 

          CRS Report No. 88-697 S

 

 

___ Value-added tax: should it be calculated by the credit-invoice or

 

     subtraction method?, by James M. Bickley. [Washington] June 15,

 

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          CRS Report No. 92-504 E

 

 

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          CRS Report No. 92-876 E

 

 

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     [Washington] 1988. 23 p.

 

          CRS Report No. 88-288 E

 

 

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     [Washington] 1991. (Updated regularly)

 

          CRS Issue Brief No. IB91078

 

 

___ The incidence of a value-added tax on the family, by James M.

 

     Bickley. [Washington] 1985. 15 p.

 

          CP 1950

 

FOOTNOTES

 

 

1 For a comprehensive examination of the need for fiscal restraint, see: U.S. General Accounting Office. Budget Policy: Prompt Action Necessary to Avert Long-term Damage to the Economy; Report to Congressional Requesters. OCG-92-2, June 5, 1992. Washington, 1992. 116 p. (Hereinafter referred to as GAO, Budget Policy.)

2 The OECD is an international governmental body dedicated to promoting international trade, economic growth, and economic stability. The OECD consists of 18 European nations, Turkey, the United States, Canada, Australia, New Zealand, and Japan.

3 These factors of production have specific meanings to an economist. Labor consists of all employees hired by the firm. Land consists of all natural resources including raw land, water, and mineral wealth. Capital is anything used in the production process which has been made by man. The entrepreneur is the decision maker who operates the firm.

4 Numerical examples with explanations of these three methods of calculating VAT are shown in appendix A.

5 For a comprehensive comparison of the credit-invoice method and the subtraction method, see: Bickley, James M. Value-added Tax: Should It Be Calculated by the Credit-invoice or Subtraction Method? Report No. 92-504 E. Washington, Congressional Research Service, 1992. 12 p.

6 Table B1 in appendix B summarizes the selective economic effects of exemption and zero-rating which were discussed in this section.

7 Due, John F. Some Unresolved Issues in Design and Implementation of Value-Added Taxes. National Tax Journal, v. 43, no. 4. p. 385.

8 For fiscal year 1989, the composition of taxes for all members of the OECD in 1989 is shown in table C1 of appendix C.

9 A Japanese VAT of three percent began on April 1, 1989.

10 This section of this report summarizes the following source: Bickley, James M. Value-added Tax: Revenue Estimates for FY94. Report No. 92-876 E. Washington, Congressional Research Service, 1992. 8 p.

11 These CRS bases are remarkably close to the VAT bases formulated by Charles E. McLure, Jr., and Richard A. and Peggy B. Musgrave. For a comparison of these tax bases, see: Value-Added Tax: Revenue Estimates for FY94, p. 2-7.

12 Taxing Consumption. Paris, Organization for Economic Co- operation and Development, 1988. p. 107.

13 Ibid., p. 36.

14 For summary examples of VAT exclusions for 15 OECD nations, see appendix E.

15 Data Resources, Inc. Forecast Summary. Review of the U.S. Economy. October 1992. p. 13.

16 Taxing Consumption, p. 203.

17 Ibid., p. 205.

18 U.S. Department of the Treasury. Office of the Secretary. Tax Reform for Fairness, Simplicity and Economic Growth. Volume 3. Value-added Tax. [Washington] November 1984. p. 124. (Hereinafter referred to as Treasury I.)

19 CRS calculation using data from the following sources: Internal Revenue Service. Statistics of Income Bulletin. Summer 1988. Washington, 1988. p. 137; and, Treasury I, p. 63.

20 Ibid.

21 U.S. Department of the Treasury. Internal Revenue Service. Annual Report 1991. Washington, U.S. Govt. Print. Off., 1992. p. 36.

22 Ibid.

23 Taxing Consumption, p. 203, 205.

24 Taxing Consumption, p. 199-200.

25 Ibid., p. 201.

26 For a detailed discussion of these ten types of evasion, see: Tait, Alan A. Value-added Tax: International Practice and Problems. Washington, International Monetary fund, 1988. p. 308--314.

27 For an overview of the incidence of the VAT using income as a measure of ability-to-pay, see: U.S. Congressional Budget Office. Effects of Adopting a Value-Added Tax. Washington, U.S. Govt. Print. Off., February 1992. p. 31-47. (Hereinafter referred to as CBO, Effects of Adopting a Value-Added Tax.)

28 Brashares, Edith, Janet Furman Speyrer, and George N. Carlson. Distributional Aspects of a Federal Value-added Tax. National Tax Journal, v. 41, no. 2, June 1988. p. 158-159, 174.

29 Modigliani estimates that at least 80 percent of all savings by households are eventually spent on consumption, see: Modigliani, Franco. The Role of Intergenerational Transfer and Life Cycle Saving in the Accumulation of Wealth. Journal of Economic Perspectives, v. 2, no. 2, Spring 1988. p. 15-23.

30 Tait, Value-added Tax: International Practice and Problems, p. 218.

31 Brashares et al. Distributional Aspects of a Federal Value- added Tax, p. 165.

32 Aaron, Henry J., ed. The Value-added Tax: Lessons from Europe. Washington, The Brookings Institution, 1981. p. 8-9.

33 Taxing Consumption, p. 276-278.

34 EC Finance Ministers Adopt Directives Harmonizing VAT, Excise Duties. Daily Tax Report, no. 204, October 21, 1992. p. G2.

35 Ibid.

36 Taxing Consumption, p. 36.

37 Brashares et al., Distributional Aspects of a Federal Value-added Tax, p. 172.

38 Due, John F., and John L. Mikesell. Sales Taxation: State and Local Structure and Administration. Baltimore, Johns Hopkins University Press, 1983. p. 65.

39 Ibid., p. 74.

40 Tait, Value-added Tax: International Practice and Problems, p. 218.

41 Ibid.

42 Aaron, Henry J. The Political Economy of a Value-added Tax in the United States. Tax Notes, v. 38, no. 10, March 7, 1988. p. 1113.

43 Ibid.

44 Aaron, Henry J. The Value-added Tax: Sorting Through the Practical and Political Problems. The Brookings Review, Summer 1988. p. 13.

45 For data on the different VAT rates in OECD countries, see appendix F.

46 For an explanation of the components of national saving, see: Rose, Harold. The Question of Saving. London, British-North American Committee, 1991. p. 1-3.

47 U.S. Library of Congress. Congressional Research Service. Economic Effects of a Value-added Tax on Capital Formation. Report No. 88-697 S, by Jane G. Gravelle. Washington, 1988. p. 2.

48 CBO, Effects of Adopting a Value-Added Tax, p. 52-53.

49 Aaron, The Political Economy of a Value-added Tax in the United States, p. 1,113.

50 The optimal size of government is a value judgment. A larger public sector is neither inherently better nor worse than the existing size of the public sector.

51 For a discussion of variables that may affect the size of government, see: Musgrave, Richard A., and Peggy B. Musgrave. Public Finance in Theory and Practice. 4th ed. New York, McGraw-Hill, 1985. p. 146-153.

52 For an overview of State tax officials' concerns related to the enactment of a broad-based Federal consumption tax, see: U.S. General Accounting Office. State Tax officials Have Concerns About a Federal Consumption Tax. Washington, March 1990. 77 p.

53 Alice M. Rivlin has proposed that the States assume full responsibility for most social services and that the Federal Government assist in financing this change through common shared taxes. One of her possible shared taxes would be a VAT. For her presentation of her proposal, see: Rivlin, Alice M. Reviving the American Dream. Washington, The Brookings Institution, 1992. 196 p.

54 Tait, Value-Added Tax: International Practice and Problems, p. 8.

55 Advisory Commission on Intergovernmental Relations. Changing Attitudes on Governments and Taxes. Washington, 1983. p. 4.

56 Ibid.

57 Ibid.

58 Ibid., p. 9.

59 Media General/Associated Press Poll. Richmond, Media General, November 20, 1988. p. 1.

60 Ibid., p. 2.

61 The Harris Poll. Creators Syndicator, Inc., Los Angeles, January 8, 1989. p. 1.

62 Ibid.

63 Ibid., p. 2.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Bickley, James M.
  • Institutional Authors
    Congressional Research Service
  • Index Terms
    VAT
    OECD
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-3243 (45 original pages)
  • Tax Analysts Electronic Citation
    93 TNT 56-46
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