Comparing the Value-Added Tax to the Retail Sales Tax
For Richard F. Dye , There J. McGuire
Journal of Public Economics
April 2011
Overview of VAT
More than 130 countries u VAT as a key source of government revenue. VAT is a general, broad-bad consumption tax assd on the value added to goods and rvices. VAT is generally levied on value added at every stage of production, with a mechanism allowing the llers a credit for the tax they have paid on their own purchas of goods and rvices (input tax) against the taxes collected on their sales of goods and rvice (output tax). Generally, VAT is: A general tax that applies to all commercial activities
involving the production and distribution of goods and the provision of rvices; A consumption tax ultimately borne by the consumer; An indirect tax levied on the consumer as part of the price of goods or rvices; A multistage tax visible at each stage of the production and distribution chain; and A fractionally collected tax that us a system of partial payments whereby a ller charges VAT on all of its sales with a corresponding claim of credit for VAT that it has been charged on all of its purchas.
There are three methods of calculating VAT liability: the credit-invoice method, the subtraction method, and the addition method. This column deals with only the credit-invoice method, which is the most widely ud. The credit-invoice method highlights the VAT defining feature: the u of output tax (tax collected on sales) and input tax (tax paid on purchas). A taxpayer generally computes its VAT liability as the difference between the VAT charged on taxable sales and the VAT paid on taxable purchas. This method requires the u of an invoice that parately lists the VAT component of all taxable sales. The sales invoice for the ller becomes the purcha invoice of the buyer. The sales invoice shows the output tax collected and the purcha invoice shows the input ta
x paid. To summarize, taxpayers u the credit-invoice method to calculate the amount of VAT to be remitted to the taxing authorities in the following manner: Aggregate the VAT shown in the sales invoices (output tax); Aggregate the VAT shown in the purcha invoices (input tax); Subtract the input tax from the output tax and remit any balance to the government; and In the event the input tax is greater than the output tax. The United States is the only member of the Organization of Economic Cooperation and Development that does not levy a VAT on a national level; however, VAT has become widely recognized as an important option in federal tax reform debates.
Indirect taxes such as value added taxes (VAT) generate a substantial part of tax revenue in many countries. In fact, VAT systems generate a quarter of the world’s tax revenue. Nearly 130 countries now have a VAT system (with over 70 countries having adopted the system during the last 10 years) (Keen and Mintz 2004). More focus on internationally mobile tax bas has drawn attention to directing more of the tax burden to indirect taxes such as consumption taxes or VAT systems, and less to income q版动漫人物图片taxes, especially capital income (Gordon and Nieln 1997). During the harmonization of EU taxes, indirect taxes,
and VAT systems received much attention (Fehr et
al. 1995). A general VAT law covering all private goods and rvices characterizes the current EU system, but there are still many exemptions from this general instruction.Such a VAT system also exists in Norway as a conquence of the Norwegian VAT reform in 2001. The reform introduced a general VAT law on rvices, but many exemptions are still specified.
There are veral arguments in favor of a general and uniform VAT system, compared with imperfect, nonuniform (and nongeneral) systems. Such a system may improve economic efficiency and reduce administration costs, rent-eking and fraud activities by industries that lobby for lower rates and zero ratings (Keen and Smith 2006). A general and uniform VAT system equals a uniform consumer tax on all玩具房 goods and rvices.水中瑜伽 Such a system also implies that the producers’ net VAT rate虾仁丝瓜 on material inputs equals zero, irrespective of the rate structure. This is optimal according to the production efficiency theorem (Diamond and Mirrlees 1971a, 1971b).A VAT system with exemptions violates the production efficiency theorem becau
taxation of intermediates will differ between industries. On the other hand, industries that are covered by the VAT system but have lower rates or zero ratings on their sales母爱像什么 are favored becau they can withdraw expenditures to VAT on intermediates at full rates and only levy reduced or zero rates on their sales.
关于法制的手抄报A general and uniform VAT system may also have positive effects on the distribution of welfare among houholds. If the initial situation is characterized by a VAT on most goods but only on a few rvices, the introduction of a uniform rate on all补肝护肝 goods and rvices may improve the distribution of welfare becau rvices’ share of consumption increas with income.
Keen (2007) points to the lack of interest in value added taxation from the theoretical cond-best literature in spite of the VAT’s popularity in practical tax policy. As 元谋土林mentioned above, VAT systems are in general not uniform. Theoretical analys demand relatively simple models and simple tax structures to be analytically tractable.In practical policies, the structures of the economy and the tax systems are quite complex, and there is a nee
d for detailed numerical models in order to analyze the effects of different VAT systems. This paper contributes to the literature by analyzing the welfare effects of an imperfect extension of a nonuniform VAT system, and comparing different imperfect, nonuniform VAT systems with a uniform and general
