Alternative Forms of
General Sales Tax
In recent years the value-added tax has been the form of general sales tax most commonly proposed for introduction by the federal government. But any serious discussion of a federal VAT should include consideration of the retail sales tax, a much more familiar and quite productive source of state and local revenue in the United States.The first section of this chapter compares the retail sales tax and the VAT. A VAT that would exclude the retail stage and a gross receipts tax have also occasionally been mentioned in the recent debate. The second and third sections indicate why these alternatives should not receive serious consideration.
In theory the VAT and a pure form of the retail sales tax are economically equivalent. But in actuality the two taxes are likely to be different for administrative reasons, quite aside from any differences in their tax bases arising from policy decisions. These differences and the resulting administrative advantages and disadvantages of the two ways of implementing sales taxes are reviewed in this section. It may be worth noting at the outset that most of the differences are not inherent in the two approaches and are easily overstated. For the sake of holding the discussion to manageable proportions, the retail sales tax is compared only with a consumption-based VAT imposed under the credit method, the most likely candidate for adoption in the United States. 1
The retail sales tax has the substantial advantage of familiarity. The five states that do not levy sales taxes— Alaska, Delaware, Montana, New Hampshire, and Oregon—are among the least populous in the nation. The retail sales tax is also somewhat easier to understand and implement than the VAT. Thus far less education would be required by introduction of a federal retail sales tax than of a VAT.