Scoping Out the Uncertain Simplification (Complication?) Effects of VATs, BATs and Consumed Income Taxes

Abstract

Of the many things we do not know about a national, broad-based consumption tax, this article addresses only one of the important uncertainties: the impact of a consumption tax on the overall intricacy of the federal revenue system. More specifically, this article examines some important issues regarding the effects on tax system complexity of the three principal candidates for a national consumption tax-the European-style, credit method value added tax (VAT), the subtraction method VAT, and the consumed income tax.
Under a credit method VAT, a business subtracts the VAT paid on its purchases (including capital expenditures) from the VAT it collects on sales and either remits to the government the tax collected in excess of tax paid or receives from the government a refund of tax paid in excess of tax collected. This system effectively taxes each business on the value that it adds to goods and services. Under a subtraction method VAT, a business deducts business purchases, including capital outlays, from sales and pays tax on the difference. A subtraction method VAT, sometimes called a business activities tax (BAT), differs from a single-rate credit method VAT only in computation procedure, and the two taxes produce the same revenue if imposed at the same rate. Businesses are usually required to settle VAT accounts with the government more often than annually.