Magazine article USA TODAY

Considering the Value Added Tax Alternative

Magazine article USA TODAY

Considering the Value Added Tax Alternative

Article excerpt

In January, 1996, the National Commission on Economic Growth and Tax Reform released its much awaited report, "Unleashing America's Potential: A Pro-Growth, Pro-Family Tax System for the 21st Century." According to Internal Revenue Service estimates, businesses will spend about 3,400,000,000 hours and individuals an additional 1,700,000,000 hours in tax-related paperwork, at a cost of $200,000,000,000 a year. Mobil Corp. testified to the Commission that it took the firm the equivalent of 57 full-time employees working for a year and cost the company about $10,000,000 to do its taxes.

There has to be a better way. However, while the Commission was clear and definitive with respect to what had to go, it could not come up with a recommended replacement. The Commission laid out the universe of ideas, ranging from a retail sales tax to a flat tax to a cash flow tax, but left the weighing of the benefits and burdens of the proposed alternatives to the reader.

One proposed alternative is a value-added tax (VAT) imposed and collected on the "value added" at every stage in the production and distribution process of a good or service. Although there are several ways to compute the taxable base for a VAT, the amount of value added can be thought of as the difference between the value of sales (outputs) and purchases (inputs) of an enterprise.

The amount of value added may be determined under a VAT in a number of ways. The two most common are the credit invoice and subtraction methods. The credit invoice method is the system of choice in nearly all of the countries that have adopted a VAT, while the subtraction method, sometimes referred to as a business transfer tax, has been used in New Hampshire and Michigan.

Credit invoice method

Under the credit invoice method, a tax is imposed on the seller for all sales. It is calculated by applying the tax rate to the sales price of the goods or services, and the amount of tax generally is disclosed on the sales invoice. A business credit is provided for all VAT paid on purchases of taxable goods and services used in the seller's business (inputs). The ultimate consumer (a non-business purchaser) does not receive a credit with respect to his or her purchases. The VAT credit for inputs prevents the imposition of multiple layers of tax with respect to the total final purchase price. As a result, the net tax paid at every individual stage of production or distribution is based on the value added by that taxpayer at that stage of production or distribution. …

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