A Value-Added Tax for the United States?

June 1, 1979

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Foreword

The value-added tax (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 depreciation 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 base 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.

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