In the Philippines, for example, Sen. Ralph Recto, a chief proponent of VAT in the early s, was voted out of office by the electorate when he ran for reelection.
However, in the years that followed its implementation, the population eventually accepted the tax. Recto ended up finding his way back to the Senate, where he became the proponent of an expanded VAT. Industrial nations that have adopted a VAT system have had mixed results, with one study noting that any country making the switch feels an initial negative impact from reduced tax revenues.
VATs and sales taxes can raise roughly the same amount of revenue. The differences lie in the point at which the money is paid and by whom. The VAT differs in that it is paid at different stops along the supply chain; the farmer pays 3 cents, the baker pays 4 cents, and the supermarket pays 3 cents. However, a VAT offers advantages over a national sales tax.
It is much easier to track. The exact tax levied at each step of production is known. With a sales tax, the entire amount is rendered after the sale, making it difficult to allocate to specific production stages. Additionally, because the VAT only taxes each value addition—not the sale of a product itself—assurance is provided that the same product is not double taxed. There has been much debate in the United States about replacing the current income tax system with a federal VAT.
Advocates claim it would increase government revenue, help fund essential social services, and reduce the federal deficit. A VAT would change the structure of production in the United States, as not all firms will be equally able to absorb the increased input costs.
It is unknown if the additional revenue would be used as an excuse to borrow more money—historically proven to be the case in Europe—or reduce taxes in other areas potentially making the VAT budget neutral.
In addition to the fiscal arguments, proponents of a VAT in the United States suggest that replacing the current income tax system with a federal VAT would have other positive effects. Proponents argue that a VAT would not only greatly simplify the complex federal tax code and increase the efficiency of the Internal Revenue Service IRS but also make it much more difficult to avoid paying taxes.
If a VAT supplants U. This change not only confers a stronger incentive to earn; it also encourages saving and discourages frivolous spending at least theoretically. Opponents note potential drawbacks of a VAT, including increased costs for business owners throughout the chain of production.
Because VAT is calculated at every step of the sales process, bookkeeping alone results in a bigger burden for a company, which then passes on the additional cost to the consumer. It becomes more complex when transactions are not only local but also international. Different countries may have different interpretations on how to calculate the tax. This not only adds another layer to the bureaucracy but also can result in unnecessary transaction delays.
While a VAT system may be simpler to maintain, it is costlier to implement. Tax evasion can continue, and even be widespread, if the general public does not give it wholehearted support. Smaller businesses in particular can evade paying VAT by asking their customers if they require a receipt, adding that the price of the product or service being purchased is lower if no official receipt is issued.
In the United States, a federal VAT could also create conflicts with state and local governments across the country, which currently set their own sales taxes.
Critics note that consumers typically wind up paying higher prices with a VAT. While the VAT theoretically spreads the tax burden on the added value of a good as it moves through the supply chain from raw material to final product, in practice, the increased costs are typically passed along to the consumer. A value-added tax VAT is a flat tax levied on an item. It is similar in some respects to a sales tax, except that with a sales tax, the full amount owed to the government is paid by the consumer at the point of sale.
With a VAT, portions of the tax amount are paid by different parties to a transaction. VAT revenue accounts for a significant share of total tax revenues in countries that levy such a tax more than countries worldwide and all OECD countries except the United States. The Tax Foundation works hard to provide insightful tax policy analysis.
Our work depends on support from members of the public like you. Would you consider contributing to our work? We work hard to make our analysis as useful as possible.
Would you consider telling us more about how we can do better? Businesses must track and document the VAT they pay on purchases to receive a credit for the VAT paid on their tax return. Under a VAT regime , tax jurisdictions receive tax revenue throughout the entire supply chain, not just at the point of sale to the final consumer.
Before the South Dakota v. Sales tax automation software can help you understand and determine if you have met the nexus threshold. For both sales tax and VAT , the seller is responsible for collecting the tax and remitting to the appropriate tax authority, although there are cases where the buyer must recognize the tax instead.
Sales tax vs. VAT overview Sales tax is collected by the retailer when the final sale in the supply chain is reached. What triggers the tax administration requirement? Sales tax obligations are triggered by: Nexus — e. Under this method, businesses are taxed on their sales at each stage of production but obtain credits for the taxes they paid on inputs. Most countries with a value-added tax VAT employ the credit-invoice method.
These purchasers, in turn, claim a credit for taxes paid but then pay VAT on the full value of their sales. The result is that there are no net taxes on sales between registered VAT businesses, while the full value of the final sale to the consumer bears tax table 1.
Under a subtraction-method VAT, sometimes called a business transfer tax, businesses pay tax on the difference between the value of their sales and the value of their purchases from other businesses. As with the credit-invoice VAT, the sum of all the amounts subject to tax, without exemptions, is equal to the value of final sales. Japan uses a subtraction-method VAT, but it contains all the invoice requirements and rules of the credit-invoice method, so in practice it is not that different from the VATs used in other countries.
Tax Analysts. Toder, Eric, and Joseph Rosenberg. Skip to main content. How does the federal government spend its money? What is the breakdown of revenues among federal, state, and local governments? How do US taxes compare internationally?
Federal Budget Process How does the federal budget process work? What is the history of the federal budget process? What is the schedule for the federal budget process? What is reconciliation? How is a budget resolution enforced? What are rescissions? Federal Budget Outlook How accurate are long-run budget projections? What have budget trends been over the short and long term?
How much spending is uncontrollable? What are tax extenders? What options would increase federal revenues? What does it mean for a government program to be off-budget? How did the TCJA affect the federal budget outlook? Taxes and the Economy How do taxes affect the economy in the short run?
How do taxes affect the economy in the long run? What are dynamic scoring and dynamic analysis? Do tax cuts pay for themselves? On what do economists agree and disagree about the effects of taxes on economic growth?
What are the economic effects of the Tax Cuts and Jobs Act? Economic Stimulus What is the role of monetary policy in alleviating economic downturns? What are automatic stabilizers and how do they work? What characteristics make fiscal stimulus most effective? Distribution of Tax Burdens How are federal taxes distributed? Are federal taxes progressive? How should progressivity be measured? What is the difference between marginal and average tax rates?
What criticisms are levied against standard distributional analysis? How should distributional tables be interpreted? Who bears the burden of the corporate income tax? Who bears the burden of federal excise taxes? How do financing methods affect the distributional analyses of tax cuts?
How do taxes affect income inequality? Tax Expenditures What are tax expenditures and how are they structured? What is the tax expenditure budget? Why are tax expenditures controversial? What are the largest tax expenditures? How did the TCJA affect tax expenditures? Tax Gap and Tax Shelters What is the tax gap?
What does the IRS do and how can it be improved?
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