Tax Policy:

Value-Added Tax Issues for U.S. Tax Policymakers

GGD-89-125BR: Published: Sep 15, 1989. Publicly Released: Sep 15, 1989.

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GAO provided information on the advantages and disadvantages of the value-added tax, focusing on: (1) how the tax would operate; (2) European countries' experiences with value-added tax; and (3) the key issues in deciding whether or not to enact such a tax.

GAO found that: (1) a comprehensive 5-percent value-added tax could raise about $125 billion in revenues annually, while one that exempted food, housing and medical care would raise about $72 billion; (2) most countries use the tax-credit-method value-added tax, which is calculated separately for each purchase or sale and included in the price at each stage of production or distribution; (3) 47 countries have introduced a value-added tax over the past 30 years, several countries have considered proposals, and Canada plans to implement a value-added tax in 1991; (4) the European Economic Community required the value-added tax as a condition for membership as a means of decreasing trade and other economic distortions among its members; (5) although a few industrialized countries did not have the value-added tax system, all but the United States had some type of broad-based national consumption tax; (6) the value-added tax preserved neutrality between capital and labor, since it created no incentive for businesses to substitute one factor for another; and (7) the advantages of the United States adopting a value-added tax would include its potential self-enforcement and lack of bias against savings, while the disadvantages would include regressivity, its use to generate revenue and increase public expenditures, the impact on international trade, the introduction and cost of a consumption tax system at the federal level, administrative and business compliance aspects, and potential conflicts with state and local tax bases.

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