Effects of Adopting a Value-Added Tax

100 Pages·2009·3.27 MB·English

by  Congressional Budget Office

CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
CBO

EFFECTS OF ADOPTING A
VALUE-ADDED TAX
The Congress of the United States
Congressional Budget Office

PREFACE
The United States has continued to rely heavily on the income tax for
federal revenue as other nations have turned increasingly to a value-
added tax (VAT) for revenue. The United States is now one of the few
Western industrialized countries without a VAT and the only one
without either a VAT or a national sales tax.
This study, prepared at the request of the House Committee on the
Budget, analyzes the effects of using a VAT instead of the current in-
come tax to raise revenue. The study attempts to measure the size of
many of the VAT's effects that interest policymakers, including the po-
tential economic costs and benefits.
Jon Hakken and Rosemarie Nielsen conducted the study and
wrote the report under the supervision of Rosemary Marcuss, Joseph
Cordes, and Eric Toder. Frank Sammartino was responsible for simu-
lating and analyzing the distribution of the VAT's tax burden among
taxpayers. Jane Gravelle provided simulations of the VAT's effects on
saving and economic efficiency. Milka Casanegra de Jantscher, Albert
Davis, Jane Gravelle, Joyce Manchester, and Frederick Ribe reviewed
parts of the study and offered many helpful comments.
Sherry Snyder edited the manuscript. Chris Spoor provided edito-
rial assistance. Martina Wojak prepared the study for publication with
the assistance of Kathryn Quattrone.
Robert D. Reischauer
Director
February 1992

CONTENTS
SUMMARY ix
I INTRODUCTION 1
Issues Surrounding the Adoption
ofaVAT 1
Analytic Approach and Findings 4
HOW A VAT WORKS
The European-Style VAT 6
Alternative VAT Structures 14
Conclusions 19
THE BASE OF A VALUE-ADDED TAX 21
Defining the Tax Base 21
Taxing Hard-to-Tax Goods and Services 26
WHO BEARS THE BURDEN OF A VAT? 31
Annual Tax Burdens 32
Lifetime Tax Burdens 40
Transitional Burdens 45
ECONOMIC EFFECTS OF A VAT 49
National Saving and Domestic Investment 51
The Composition of Domestic Production
and International Trade 55
Economic Efficiency 56
Tax Exportation 60
Other Economic Effects 62
Summary 65
vi EFFECTS OF ADOPTING A VALUE-ADDED TAX February 1992
VI COSTS OF ADMINISTERING AND
COMPLYING WITH A VAT 67
Administrative Costs 67
Implementation Costs 70
Compliance Costs 70
Controlling Administrative and
Compliance Costs 72
VII DIRECT CONSUMPTION TAX AS AN
ALTERNATIVE TO A VAT
Direct Consumption Taxes 75
Advantages over a VAT 77
Some Potential Problems 79
CONTENTS vii
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TABLES
1. Taxing Consumer Purchases Under a
Credit-Method Value-Added Tax
and a Retail Sales Tax
Collecting a Value-Added Tax When a
Wholesaler Is Exempt
Collecting a Value-Added Tax When a
Retailer Is Exempt
Collecting a Value-Added Tax for a
Zero-Rated Good
Collecting a Value-Added Tax for a
Traded Good
Taxing Consumer Purchases Under a
Subtraction-Method Value-Added Tax
Collecting a Value-Added Tax for a
Zero-Rated Good Under Alternative Versions
of the Subtraction Method
Examples of Bases for a Value-Added Tax
at 1988 Levels of Consumption
Distribution of the Burden of a Value-Added
Tax and an Income Surtax
Distribution of the Burden of a Value-Added
Tax Under Alternative Redistribution Schemes
Annual and Lifetime Tax Burdens of Canadian
Households
viii EFFECTS OF ADOPTING A VALUE-ADDED TAX February 1992
12. Annual Administrative Costs of Value-Added
Taxes in Selected European Countries,
1985 and 1986
13. Costs to Businesses of Complying with a
Value-Added Tax in the United Kingdom,
1986and1987
FIGURE
1. How the Burden of a Value-Added Tax and
an Income Surtax Varies Over a Lifetime
for a Typical Two-Earner Family