Problem Industries and Activities
Much of the discussion to this point has been conducted in general terms, without reference to how particular industries or activities might be treated under the value-added tax. Certain industries and activities, however, for social, economic, political, or administrative reasons, are usually not accorded the standard textbook treatment. These include small business, farming, services, housing, used goods, the services of financial institutions, benefits in kind, and the activities and purchases of governments and nonprofit organizations.
This chapter briefly describes the problems that arise in these areas, how they might be handled, and how they are handled in Europe and elsewhere. Since many of these problems are complex and do not readily yield satisfactory solutions, it is not possible to do more than scratch the surface in a brief survey such as this. 1 For the most part the discussion is couched in terms of the credit method of implementing the VAT. But possible solutions under both the naive and the sophisticated versions of the subtraction method are also discussed. Particular attention is devoted to Senator William Roth's proposal for an extraordinarily high small-business exemption, since a large exemption would have even more adverse effects under a subtraction-method VAT such as Roth's business transfer tax (BTT) than under the credit method.
Most countries allow special treatment for small businesses under the VAT. 2 To some extent this reflects political compromise and recognition of administrative reality. 3 It may not be feasible or fair to subject numerous small-scale businesses to the complex requirements of compliance with the VAT. 4 Some countries simply exempt small businesses, recognizing that under the credit method firms not in the system pay tax on their purchases, so that only their own value added escapes taxation. 5 Others attempt to employ ad hoc levies that approximate the amount that should be payable by the representative