An analysis of the value-added tax as an alternative source of federal revenue.

The reluctance of the Administration and Congress to respond to the continuing federal budget deficit by raising income tax rates and/or reducing spending, combined with the shrinking number of tax loopholes and base broadeners, has prompted the consideration of alternative sources of federal revenue. An alternative revenue source that is receiving increasing study is a value-added tax. Both the General Accounting Office and the Joint Committee on Taxation have recently researched the effect of this tax. The introduction of a consumption-based value-added tax would represent a fundamental change in the United States federal tax system.

The purpose of this paper is to identify and discuss the major issues concerning the value-added tax (hereafter referred to as VAT). Following a brief history of the VAT, the concept of value-added, the types of VAT, the methods of computation, and the rate structure of the VAT are identified. The advantages and disadvantages of the VAT will be enumerated and evaluated. Finally, some closing comments will be offered.

A BRIEF HISTORY OF THE VAT

The VAT in Europe, Latin America, and Africa

The VAT has become a major tax. No longer just a tax associated with Europe, the VAT is now levied in countries throughout the world. In Europe, the VAT "evolved through successive attempts to reduce the inequities of the cascade turnover tax which was the sales tax commonly used by the countries now forming the European Economic Committee' [18, p. 6].

Impetus for the adoption of a VAT by the European Economic Committee (ECC) came from the recommendations of the Neumark Report, which was issued in 1963 as a product of a study designed to develop uniform tax practices in the Common Market countries. At that time, the differing turnover taxes created barriers to the flow of goods and services in the ECC countries. "For example, the separate governments often granted arbitrary rebates to exporters to make home-produced goods more competitive in foreign markets and imposed discriminatory natory duties on imports to benefit domestic enterprises" [13, p. 8].

The United States and the VAT