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CRS REPORT RECOMMENDS CREDIT-INVOICE METHOD OF CALCULATING VAT.

JUN. 15, 1992

92-504 E

DATED JUN. 15, 1992
DOCUMENT ATTRIBUTES
  • Authors
    Bickley, James M.
  • Institutional Authors
    Congressional Research Service Economics Division
  • Index Terms
    VAT
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-5498
  • Tax Analysts Electronic Citation
    92 TNT 128-48
Citations: 92-504 E

                       CRS Report for Congress

 

 

                          James M. Bickley

 

                    Specialist in Public Finance

 

                         Economics Division

 

 

                            June 15, 1992

 

 

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. There are two methods of calculating the VAT: the credit-invoice method and the subtraction method or BTT method.

Under the CREDIT-INVOICE METHOD, a firm is required to show VAT separately on all sales invoices. Each sale would be marked up by the amount of the VAT. A sales invoice for a seller is a purchase invoice for a buyer. A firm would calculate the VAT to be remitted to the Government by a simple three-step process. First, the firm would aggregate VAT shown of its sales invoices. Second, the firm would aggregate VAT shown on its purchases invoices. Finally, aggregate VAT on purchase invoices would be subtracted from aggregate VAT shown on sales invoices and the difference remitted to the Government. Under the SUBTRACTION METHOD, a firm would calculate its value added by subtracting its cost of taxed inputs from its sales. Next, the firm would determine its VAT liability by multiplying its value added by the VAT rate.

There are seven aspects of the credit-invoice and the subtraction method that can be contrasted: exemption and zero-rating, experience, evasion, flexibility, compliance costs, administrative costs, and explicitness. Exemption of a firm works better under the subtraction method, but zero-rating (charging a zero tax rate) works better under the credit-invoice method. The credit-invoice method has a record of proven performance. Tax experts have a through knowledge of procedures to administer a credit-invoice VAT. All developed nations except Japan use the credit-invoice method. Evasion would be lower under the credit-invoice method than the subtraction method because only the credit-invoice method would give tax auditors the opportunity to cross-check invoices. The credit-invoice method would be more flexible because it would allow the imposition of multiple tax rates including a zero rate to exclude some products from taxation. But supporters of the subtraction method argue that this increased flexibility of the credit-invoice method could be considered a disadvantage because many tax experts agree that a VAT with a single rate and broad base would be optimal. 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. The credit-invoice method would have substantial compliance costs because the amount of VAT would have to be shown on every sales invoice. The credit-invoice method would have greater administrative costs than the subtraction method because of its requirements for additional data, computations, and record-keeping. A credit-invoice VAT may be either hidden or explicit, but a subtraction VAT must be hidden.

In summary, the credit-invoice method of calculating VAT has some advantages and disadvantages compared to the subtraction method, but most leading tax economists recommend using the credit-invoice method.

TABLE OF CONTENTS

METHODS OF CALCULATING VAT

 

 

CONTRAST BETWEEN CREDIT-INVOICE AND SUBTRACTION METHODS

 

 

  EXEMPTION AND ZERO-RATING

 

 

    Exemption

 

    Zero-Rating

 

 

  EXPERIENCE

 

  EVASION

 

  FLEXIBILITY

 

  COMPLIANCE COSTS

 

  ADMINISTRATIVE COST

 

  EXPLICITNESS

 

 

APPENDIX A: CREDIT-INVOICE AND SUBTRACTION METHODS

 

SELECTED BIBLIOGRAPHY

 

 

VALUE-ADDED TAX: SHOULD IT BE CALCULATED BY THE CREDIT-INVOICE OR SUBTRACTION METHOD?

Some Members of Congress have expressed interest in a new revenue source to finance either large forecasted deficits in the Federal budget or proposed national health insurance. One policy option has been the imposition of a value-added tax (VAT), a broad- based consumption tax, because of its high revenue potential and widespread use by other developed nations. 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). 1 Another method of calculating a firm's value added is to total the firm's payments to its factors of production.

A major controversy concerning the VAT is the most appropriate method of calculating VAT to be remitted to the Government. The purpose of this CBS report is to contrast two alternative methods of calculating the VAT: the credit-invoice method and the subtraction or BTT method. In order to achieve this purpose, the report defines these two methods of calculation. Then it contrasts seven aspects of the credit-invoice method and the subtraction method. These seven aspects are exemption and zero-rating, experience, evasion, flexibility, compliance costs, administrative costs, and explicitness. This report considers the experiences of the 21 nations (out of 24 nations) with VATs in the Organisation for Economic Cooperation and Development (OECD) relevant to the two methods of calculating a VAT. 2

METHODS OF CALCULATING VAT

For the United States, two alternative methods of calculating a VAT have been proposed: the credit-invoice method and the subtraction method. 3 Under the CREDIT-INVOICE METHOD, a firm would be required to show VAT separately on all sales invoices. Each sale would be marked up by the amount of the VAT. A sales invoice for a seller is a purchase invoice for a buyer. A firm would calculate the VAT to be remitted to the Government by a simple three-step process. First, the firm would aggregate VAT shown on its sales invoices. Second, the firm would aggregate VAT shown on its purchases invoices. Finally, aggregate VAT on purchase invoices would be subtracted from aggregate VAT shown on sales invoices and the difference remitted to the Government. The credit-invoice method is calculated on a cash flow basis. Senator Ernest F. Hollings introduced legislation containing a VAT calculated by the credit-invoice method on May 17, 1989 (S.442), February 6, 1990 (S.2084), and January 14, 1991 (S.169).

Under the SUBTRACTION OR BTT METHOD, a 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. Most data required to calculate a firm's VAT to be remitted would be available from records normally kept by the firm. But, for the subtraction method to yield the same results as the credit-invoice method, a firm would have some initial costs of setting up new accounts in order for some necessary data to be available on a cash flow basis.

There would be three fundamental distinctions between the BTT [subtraction VAT] and the income tax in the treatment of deductible business expenses. First, capital expenditures for depreciable or depletable property would be FULLY DEDUCTIBLE (expensed) for purposes of the BTT. Amounts paid or incurred for inventory would be deductible, as would costs of items such as patents and copyrights. Second, compensation to employees would NOT be deductible. Compensation would include wages and salaries, deferred compensation, and other fringe benefits available to employees. Third, amounts paid or incurred for interest would not be deductible. This is an important factor for businesses with substantial debt whether incurred to acquire hard assets or to acquire a new business. 4

In 1985, Senator William Roth introduced a tax reform plan (S.1102) that included a VAT calculated by the subtraction method. Senator Roth named this VAT the BUSINESS TRANSFER TAX OR BTT. In February 1986, Senator Roth released a revised tax reform plan that also included a BTT. Senator Roth's proposed VAT received such widespread discussion that a VAT calculated by the subtraction method often is referred to as either a business transfer tax or BTT. In August 1991, Congressman Richard T. Schulze introduced tax reform legislation (H.R. 3170) that included a VAT calculated using the subtraction method. In H.R. 3170, this VAT was named the uniform business tax.

CONTRAST BETWEEN CREDIT-INVOICE AND SUBTRACTION METHODS

There are seven major aspects of the credit-invoice and subtraction methods that can be contrasted to assist in determining which method is most appropriate for a proposed U.S. VAT. The relative importance of these aspects is a subjective decision.

EXEMPTION AND ZERO-RATING

No VAT proposal would require all firms to collect the VAT. The two methods of giving special tax treatment to businesses in an industry are exemption and zero-rating.

Exemption

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).

Under the credit-invoice method, an exempt firm would not levy VAT on its sales but would pay VAT on its purchases of inputs. Except for the retail stage, the exemption of a firm would break the VAT chain (or linkage) of VAT collections and credits among different stages of production which would result in cascading.

For example, assume an industry has firms at four different stages of production: raw material producer, manufacturer, wholesaler, and retailer. If the manufacturer is exempt, it would pay VAT on purchases of raw materials but not charge VAT on its sales to the wholesaler. The wholesaler would levy VAT on its sales to the retailer but receive no offsetting credit for VAT previously paid by the wholesaler representing purchases of raw materials. Consequently, the VAT on raw materials would be paid twice.

For the subtraction method, the value added of an exempt firm is not taxed. Cascading does not occur because this untaxed value added is never taxed at a later stage of production.

Zero-Rating

Under a VAT, a zero-rated firm would be charged a zero VAT rate. A zero-rated firm would be a registered taxpayer, and, consequently, would involve the usual compliance and administrative costs.

Under the credit-invoice method, both purchases and sales are tax exempt (that is, given a tax rate of zero). A zero-rated firm receives a refund of any VAT paid on its taxed inputs in order that its costs do not include VAT paid at earlier stages.

Under the standard subtraction method, zero-rating a firm would operate improperly because the firm would not receive a refund for VAT paid on taxed inputs. The subtraction method could be modified by allowing the zero-rated firm to aggregate VAT paid on taxed inputs, and than obtain a refund for this previously paid VAT. But this modified subtraction method differs little from the credit-invoice method. 5

In brief, exemption of a firm works better under the subtraction method, but zero-rating a firm works better under the credit-invoice method.

EXPERIENCE

Of the 21 nations in the OECD with VATs, 20 calculate VAT using the credit-invoice method. Only Japan uses the subtraction method to calculate VAT, and Japan is moving towards the credit-invoice method. The credit-invoice method has a record of proven performance. Tax experts have a thorough knowledge of procedures to introduce and administer a credit-invoice VAT. 6

EVASION

The credit-invoice method requires registered firms to maintain detailed records that are cross indexed with supporting documentation. The amount of VAT shown on a sales invoice by a seller should equal the amount of VAT shown on a purchase invoice for a buyer. Hence, the credit-invoice method would give tax auditors the opportunity to cross-check invoices.

Also, each firm has a vested interest in insuring that the VAT shown on its purchase invoices is not understated in order that the firm receives full credit against VAT liability for VAT previously paid. Finally, the credit-invoice method offers tax officials additional information that they may be able to use to cross-check against other kinds of tax returns such as business income taxes and personal income taxes. This cross-checking could reduce evasion of not only the VAT but also of business income taxes and personal income taxes.

The OECD gives the following two examples of cross-checking.

Checking the sales revenue figures in the profit and loss account as part of an income tax control may provide a useful cross-check on the VAT liability of a trader;

Checking cash receipts as part of a VAT audit may identify income which would suggest that the company is under-declaring its sales and/or purchases leading in turn to under payments of VAT, the corporate tax and, possibly, social security levies. 7

But cross-checking between firms or between two different types of taxes would be expensive, consequently, cross-checking would occur on a limited basis. Thus, cross-checking would lessen but not sharply curtail evasion.

The subtraction method does not offer the opportunity to cross- check invoices. Furthermore, because the subtraction method VAT is levied directly on value-added rather than on transactions, a firm does not have a vested interest in insuring that VAT paid by suppliers is not understated. Hence, evasion could be higher under the subtraction method than the credit-invoice method.

FLEXIBILITY

The credit-invoice method would allow the imposition of multiple tax rates including a zero rate to exclude some products from taxation. In order for the subtraction method to be administered effectively, only a single tax rate can be levied. Thus the credit- invoice method is more flexible than the subtraction method.

Supporters of the subtraction method argue that the increased flexibility of the credit-invoice method could be considered a disadvantage. Many tax experts agree that a VAT with a single rate and broad base would be more neutral than a VAT with either multiple rates or a narrow base. 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. Multiple rates, including levying zero-rates, alter relative prices of goods. Prices of taxed goods or goods subject to a higher VAT rate rise relative to untaxed goods or goods subject to a lower tax rate. These relative changes in prices would distort household decisions. For example, households would be encouraged to substitute untaxed (or lightly taxed) goods for taxed (or heavily taxed) goods. A subtraction method VAT, which would only be administratively feasible if it has a single rate and a broad base, would be more likely to be imposed in a neutral fashion.

COMPLIANCE COSTS

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 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 would 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.

Compliance costs are greater for small businesses; consequently, some governments permit small businesses to either keep part of revenue collected or hold onto VAT collected for a period of time which is equivalent to receiving an interest free loan. Higher compliance costs under the credit-invoice method would increase the likelihood of financial assistance to small businesses, but any assistance would reduce net revenues from the VAT to the Government.

Because compliance costs are not imposed on exempt firms, total compliance costs could be reduced by increasing the number of exempt firms. Gross receipts is a common standard to determine the exemption of a small firm. Hence, compliance costs could be reduced by setting a higher level of gross receipts before a firm would be required to register for the VAT. There would be an incentive to have a higher exemption standard for small businesses under the credit-invoice method than the subtraction method in order to alleviate compliance costs.

ADMINISTRATIVE COST

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. For most OECD nations, administrative costs for VATs with the credit invoice method range between 0.4 percent and 1.1 percent of revenue collected. 8

These higher administrative costs of a VAT calculated by the credit-invoice method could increase the incentive for the Federal Government to negotiate some joint collection agreement with those States with retail sales taxes (RSTs). Currently, retail sales taxes are levied by forty-five States and the District of Columbia which have over 97 percent of the U.S. population. States could convert their RSTs to VATs which would allow joint collection as demonstrated in Canada. On January 1, 1991, when the Canadian government levied a seven percent VAT, nine of its ten provinces had RSTs. On January 1, 1992, the provinces of Quebec and Saskatchewan converted their RSTs to VATs using the Federal tax base which permitted joint collection. The Federal and Quebec VATs jointly are being collected mainly by Quebec officials. The Federal and Saskatchewan VATs jointly are being collected by the Federal government. 9 These combined collections have resulted in savings in administrative costs.

EXPLICITNESS

A subtraction VAT would have to be hidden, that is, it could not be stated separately on retail sales receipts. A credit-invoice VAT could be hidden or explicitly stated on retail sales receipts.

Some states might prefer that the VAT be hidden because they could levy their retail sales taxes without buyers seeing both taxes. Furthermore, if States did not change their rates for retail sales taxes, then they automatically would obtain a hidden increase in revenue because the addition of the VAT to the retail price would increase the tax base.

There might be less public resistance to a hidden tax. Hence, supporters of a larger public sector may prefer the VAT to be hidden while opponents of a larger public sector may prefer that the VAT be shown on retail sales receipts.

In summary, the credit-invoice method of calculating VAT has some advantages and disadvantages compared to the subtraction method, but most tax economists recommend using the credit-invoice method.

APPENDIX A: CREDIT-INVOICE AND SUBTRACTION METHODS

This appendix shows numerical examples of the two methods of calculating a VAT: credit-invoice and subtraction or BTT methods. The tax rate for a VAT may be PRICE INCLUSIVE (included in the sales price) or PRICE INCLUSIVE (added to the sales price). Currently all developed nations except Finland and Sweden levy their VAT rates on a price exclusive basis. 10

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 dollars, price-exclusive VAT rate assumed at 10 percent)

 

 ___________________________________________________________________

 

                                 Stage of Production of Widgets

 

                      ______________________________________________

 

 

                        Raw                                   Total

 

                      Material  Manu-      Whole-      Ret-  VAT Re-

 

 Transaction          Producer facturer    saler       ailer  mitted

 

                        /a/

 

 ___________________________________________________________________

 

 

 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 A1

 

 

/a/ As a simplification, the raw material producer is assumed to provide all of his inputs.

 

END OF FOOTNOTE

 

 

The subtraction or BTT 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 or BTT Method

 

 

 (Data in dollars, price-inclusive VAT rate assumed at 9.091 percent)

 

 ___________________________________________________________________

 

                                 Stage of Production of Widgets

 

                      ______________________________________________

 

 

                        Raw                                   Total

 

                      Material  Manu-      Whole-            VAT Re-

 

 Transaction          Producer facturer    saler     Retailer  mitted

 

                        /a/

 

 ___________________________________________________________________

 

 

 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 A2

 

 

/a/ As a simplification, the raw material producer is assumed to provide all of his inputs.

 

END OF FOOTNOTE

 

 

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.

SELECTED BIBLIOGRAPHY

Aaron, Henry J., ed. The value-added tax: lessons from Europe. Washington, The Brookings Institution, 1981. 107 p.

Canadian Tax Foundation. The national finances. Toronto, 1992. 331 p.

Cnossen, Sijbren. 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: 383-94.

Gillis, Malcolm, Carl S. Shoup, and Gerardo P. Sicat, eds. Value-added taxation in developing countries. Washington, World Bank, 1990. 237 p.

Gordon, Richard; Stephen R. Corrick, and Linda Goold. The business transfer tax -- a VAT by any other name. Tax notes, v. 30, no. 8, February 24, 1986: 765-771.

McLure, Charles E., Jr. The value-added tax: key to deficit reduction? Washington, American Enterprise Institute for Public Policy Research, 1987. 184p.

Schenk, Alan. The business transfer tax: the value added by subtraction. Tax notes, v. 30, no. 4, January 27, 1986: 351-360.

Tait, Alan A. Value-added tax: international practice and problems. Washington, International Monetary Fund, 1988. 450 p.

Taxing consumption. Paris, Organization for Economic Co-operation and Development, 1988. 335 p.

Turner, William J. VAT: minimizing administrative and compliance costs. Tax notes, v. 38, no. 11, March 14, 1988: 1257-1268.

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.

U.S. Library of Congress. Congressional Research Service. A value- added tax contrasted with a national sales tax, by James M. Bickley. [Washington] 1987. (Updated regularly)

CRS Issue Brief No. IB92069

-- Value-added tax: concepts, policy issues, and OECD experiences, by James M. Bickley. [Washington] July 19, 1991. 40 p.

CRS Report 91-559 E

-- Value-added tax for deficit reduction, by James M. Bickley. [Washington] 1991. (Updated regularly)

CRS Issue Brief No. IB91078

-- Value-added tax: tax bases and revenue yields, by James M. Bickley. [Washington] Feb. 4, 1992). 8 p.

CRS Report No. 92-176 E

 

FOOTNOTES

 

 

1 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.

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

4 Gordon, Richard, Stephen R. Corrick, and Linda Goold. The Business Transfer Tax -- A VAT by Any Other Name. Tax Notes, v. 30, no. 8, February 24, 1986. p. 767.

5 For a more detailed discussion of zero-rating under the subtraction method, see: U.S. Congressional Budget Office. Effects of Adopting a Value-Added Tax. Washington, February 1992. p. 16-18.

6 Most tax economists recommend the credit-invoice method over the subtraction method. Supporters of the credit-invoice method include Charles E. McLure, Alan A. Tait, Sijbren Cnossen, Carl S. Shoup, and Henry J. Aaron. Charls E. Walker recommends the subtraction method of calculating the VAT.

7 Taxing Consumption. Paris, Organisation for Economic Cooperation and Development, 1988. p. 200.

8 Taxing Consumption, p. 204.

9 Canadian Tax Foundation. The National Finances. Toronto, 1992. p. 83.

10 Tait, Alan A. Value-Added Tax: International Practice and Problems. Washington, International Monetary Fund, 1990. p. 8.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Bickley, James M.
  • Institutional Authors
    Congressional Research Service Economics Division
  • Index Terms
    VAT
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-5498
  • Tax Analysts Electronic Citation
    92 TNT 128-48
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