The Value-Added Tax--What Else Should We Know About It?

PAD-81-60: Published: Mar 3, 1981. Publicly Released: Mar 3, 1981.

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GAO reviewed the advantages and disadvantages of imposing a value-added tax (VAT), a consumption tax to replace some of the revenues raised by other taxes. The proposal has recurred every few years since the 1960's and was made again in Congress in 1979 and 1980. The purpose of the review is to set out what is now known about VAT and raise the questions that still ought to be answered if the United States were to consider substituting VAT for current taxes.

GAO found that double taxation is avoided by allowing businesses to credit VAT they pay on their purchases against VAT they charge on their sales. By remitting only the difference to the Government, businesses effectively are taxed on only the value they add in the production process. The retail customer, who does not resell and so cannot claim any credit, pays the entire tax. As a cure for one affliction of the current tax system, VAT could produce enough revenue to permit a reduction in the income and payroll tax rates that many believe are now too high. Because VAT is a tax on consumption, imposing VAT and reducing income and payroll taxes penalizes consumption, rewards saving, and reduces the tax burden on investment capital. A major concern about VAT is that it would be inflationary. If the income and payroll taxes it replaces are less likely to be reflected in prices, substituting VAT would bring price rises. VAT falls most heavily on people who consume most. Therefore, substitutinga VAT for an income tax shifts the burden from people with high incomes to those with large expenditures. Since the poor spend a higher proportion of their incomes on consumption than the rich, VAT is a regressive tax. Many of the problems in administering VAT are known already from the experience of other countries. Multiple rates of tax are common and increase administrative costs to taxpayers and the Government. Other tax policies could accomplish the goals that adding VAT to the tax system is supposed to achieve.

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