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A Value-Added Tax for the United States?

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Download Special Report: A Value-Added Tax for the United States?


The value-added taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (VAT) is a multi-stage levy on the value added in each stage of the production and distribution of a commodity or service, from the-earliest stage, up through-the final retail sale. Ignoring the question of how to deal with depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. of capital equipment, value added is conceptually quite simple. For a given firm, it is equal to total sales receipts after the subtraction of payments to other firms for goods and services on which tax has been paid. The value that the firm adds is equivalent to the total of its payments in wages, interest and rent paid to individuals and the owner’s profit.

While several technically differentiated types of VAT have been discussed, in the literature, emphasis has focused on two types as classified by Professor Carl S. Shoup almost a quarter of a century ago. The two types—”consumption and “income”—vary only as regards the method selected for the treatment of capital expenditures. Under the consumption type, the full cost of capital equipment is deducted from the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in the year of purchase. Under the income type, no deduction is allowed for current capital outlays in total, but rather depreciation deductions of the sort now allowed under-the corporation income tax are made over the life of the capital equipment.

The purpose of this study is to explore the various VAT proposals that have been put forth, and clarify the policy issued raised by them. Both advantages and disadvantages of VATs are discussed, and the arguments of major proponents and opponents are briefly summarized.

Download Special Report: A Value-Added Tax for the United States?