An Analysis of the Value-Added Tax as an Alternative Source of Federal Revenue

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The reluctance of the Administration and Congress to respond to the continuing federal budget deficit by raising income tax rates and/or reducing spending, combined with the shrinking number of tax loopholes and base broadeners, has prompted the consideration of alternative sources of federal revenue. An alternative revenue source that is receiving increasing study is a value-added tax. Both the General Accounting Office and the Joint Committee on Taxation have recently researched the effect of this tax. The introduction of a consumption-based value-added tax would represent a fundamental change in the United States federal tax system.

The purpose of this paper is to identify and discuss the major issues concerning the value-added tax (hereafter referred to as VAT). Following a brief history of the VAT, the concept of value-added, the types of VAT, the methods of computation, and the rate structure of the VAT are identified. The advantages and disadvantages of the VAT will be enumerated and evaluated. Finally, some closing comments will be offered.

A BRIEF HISTORY OF THE VAT

The VAT in Europe, Latin America, and Africa

The VAT has become a major tax. No longer just a tax associated with Europe, the VAT is now levied in countries throughout the world. In Europe, the VAT "evolved through successive attempts to reduce the inequities of the cascade turnover tax which was the sales tax commonly used by the countries now forming the European Economic Committee' [18, p. 6].

Impetus for the adoption of a VAT by the European Economic Committee (ECC) came from the recommendations of the Neumark Report, which was issued in 1963 as a product of a study designed to develop uniform tax practices in the Common Market countries. At that time, the differing turnover taxes created barriers to the flow of goods and services in the ECC countries. "For example, the separate governments often granted arbitrary rebates to exporters to make home-produced goods more competitive in foreign markets and imposed discriminatory natory duties on imports to benefit domestic enterprises" [13, p. 8].

The United States and the VAT

Proponents of the VAT in the U.S. are quick to point out that there has been much discussion about a VAT since 1922. In that year, T. S. Adams, a major force behind the income tax legislation of 1913, called for the adoption of a VAT as "the best approach to the taxation of business" [8, p. 42]. An unsuccessful bill was introduced in the Senate in 1940 that proposed adoption of a VAT.

During the 1960s, interest in a VAT was supported by the belief that a VAT in partial substitution for the corporate income tax would improve the balance of payments. In 1970, President Richard M. Nixon's Task Force on Business Taxation rejected the immediate adoption of the VAT but did recommend that "should the need ever arise for substantial additional revenue, the government should turn to the value-added tax or some other form of indirect taxation rather than to an increase in rates of the corporate or personal income tax" [8, p.43]. In 1973 the Advisory Commission on Intergovernmental Relations studied the VAT in connection with alternative sources of federal revenue. The study concluded that the limitations of the VAT were greater than the advantages of its implementation.

The federal tax division of the American Institute of Certified Public Accountants issued a Statement of Tax Policy in 1975 concerning the value-added tax. This study acknowledged the need for additional tax revenues and decreasing reliance on traditional taxes such as income and social security taxes. The AICPA study determined that the "imposition of an indirect tax at the federal level merits serious consideration" [2, p.42]. However, the AICPA opted for a retail sales tax at the federal level.

During 1979 and 1980, Senator Russell B Long, Chairman of the Senate Finance Committee, and Representative Al Ullman, Chairman of the House Ways and Means Committee, championed the adoption of a VAT. …