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Friday, January 27, 2012

Value-Added Tax (VAT) as a Revenue Option: A Primer

James M. Bickley
Specialist in Public Finance

This report summarizes issues, arguments, and concerns relevant to a value-added tax (VAT). Long-term fiscal problems, which were exacerbated by the recession that ended in June 2009, resulted in widespread concern about the need to formulate a fiscal solution to the high budget deficits and growing national debt. The levying of a value-added tax, a broad-based consumption tax, has been discussed as one of many options to assist in resolving U.S. fiscal problems. CRS Report R41602, Should the United States Levy a Value-Added Tax for Deficit Reduction? provides a more comprehensive examination of issues, extensive footnoting of sources, and presentation of relevant data.

A VAT is imposed at all levels of production on the differences between firms’ sales and their purchases from all other firms. Arguably, the primary reason for congressional interest in a VAT is its high potential revenue yield. Other aspects of a VAT that often raise interest or concern include international comparison of composition of taxes, VAT rates in other countries, equity, neutrality, inflation, balance-of-trade, national saving, administrative costs, compliance, intergovernmental relations, and size of government.

This report considers the experiences of the 33 nations with VATs in the 34-member Organization for Economic Cooperation and Development (OECD), relevant to the feasibility and operation of a possible U.S. VAT. In order to examine different aspects of a VAT, explanations are initially provided concerning the concept of a value-added tax, the different methods of calculating VATs, exemption, and zero-rating.

The prevailing view of tax professionals is that an optimal VAT would have the following characteristics: a broad base, a single rate, the credit-invoice method of collection, the destination principle, and a significant sales threshold for registration.

Date of Report: January 1
1, 2012
Number of Pages: 1
Order Number: R4
Price: $29.95

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