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The Value Added Tax

  • Robert W. McGee

Abstract

The value added tax (VAT) suffers from the same major deficiency as most other forms of taxation in that it is coercive. It involves the taking of property without the owner’s consent. But if one believes that some forms of takings are better than others, one might ask whether the VAT is a viable alternative to the income tax. For years, some commentators have been calling for the replacement of the income tax with some form of VAT because the income tax discourages production and encourages consumption and leisure, whereas the VAT encourages thrift and enterprise.1 Certainly, if this is so, it is a form of taxation that should be of interest to an emerging economy, where economic growth is especially important.2

Keywords

American Enterprise Institute Utilitarian Ethic Deficit Reduction Antidandruff Shampoo Taxpayer Behavior 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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NOTES

  1. 1.
    Murray L. Weidenbaum and Ernest S. Christian, Jr., The Allure of Value-Added Taxes: Examining the Pros and Cons 1 (1989).Google Scholar
  2. 2.
    A subtle issue is involved here, whether the tax system should encourage or discourage certain kinds of activity. Those who favor the VAT over the income tax often do so because they think that government should encourage savings over consumption. But is the influencing of taxpayer behavior a legitimate function of government? 1f government is the servant and taxpayers the masters, should a servant really care what the master does with his own money?Google Scholar
  3. 3.
    Charles E. McLure, Jr., The Value-Added Tax: Key To Deficit Reduction? Washington, DC: American Enterprise Institute, 1987, p. 175, For a study that considers the relative merits of a VAT as an additional revenue source by comparing it to an income surtax on individuals and corporations, see Effects of Adopting a Value-Added Tax (Washington: Congressional Budget Office, February, 1992).Google Scholar
  4. 4.
    Organization for Economic Cooperation and Development, Taxing Consumption, Paris: OECD, 1988, p. 32.Google Scholar
  5. 5.
    The question of who ultimately pays a VAT or other consumption tax is a major one, and economists cannot agree on who ultimately pays the tax David G. Bannock Raboy Cliff Massa III Who Bears the Burden of Consumption Taxes?The Value Added Tax: Orthodoxy and New Thinking Murray L. Weidenbaum David G. Raboy Ernest S. Christian Jr. 1989 39–68Google Scholar
  6. 6.
    Graham Bannock, VAT and Small Business: European Experience and Implications for North America, London: Graham Bannock & Partners Ltd., 1986, p. 8.Google Scholar
  7. 7.
    Specifically, the Securities and Exchange Commission and Congress.Google Scholar
  8. 8.
    The Japanese Consumption Tax: Value-Added Model or Administrative Nightmare? American University Law Review 40: 1265–1306 (Spring, 1991). Also see J. Gregory Ballentine, The Administrability of a Value Added Tax, in Charts E. Walker and Mark Bloomfield, editors, New Directions in Federal Tax Policy for the 1980s, Cambridge, MA: Ballinger Publishing Co., 1983; John Blundell, Britain’s Nightmare Value Added Tax, Heritage Foundation International Briefing, Washington, DC: Heritage Foundation, June 13, 1988.Google Scholar
  9. 9.
    In England, small businesses complained about the complexity of the British VAT. Their complaints subsided somewhat when the VAT tax forms were simplified. A.R. Prest, Value Added Taxation: The Experience of the United Kingdom, Washington and London: American Enterprise Institute, 1980, p. 38.Google Scholar
  10. 10.
    And where the VAT is used as a supplement to the income tax rather than as a replacement, two sets of bureaucrats and private sector accountants would be required, one to administer the VAT and another to administer the income tax requirements.Google Scholar
  11. 11 Nelson Hultberg, Why We Must Abolish the Income Tax and the 1RS: A Special Report on the National Sales Tax, Dallas: AFR Publishers, 1997; Bernard Curry, Principles of Taxation of a Libertarian Society, Glendale, CA: BC Publishing Co., 1982; Murray Sabrin, Tax Free 2000: The Rebirth of American Liberty, Lafayette, LA: Prescott Press, 1994; Frank Champagne, Cancel April 15: The Plan for Painless Taxation, Mt. Vemon, WA: Nookachamps Publishers, 1994; Jack Anderson and Tom Schatz, The Coming Tax Rebellion: How You Can End the Income Tax, Washington, DC: Citizens Against Government Waste, n.d.; Sheldon Richman, Your Money or Your Life: Why We Must Abolish the Income Tax, Fairfax, VA: Future of Freedom Foundation, 1999.Google Scholar
  12. 12.
    Weidenbaum and Christian,supra, at 4.Google Scholar
  13. 13.
    Id. These comparisons are based on the tax system in the USA in 1987.Google Scholar
  14. 14 Charles E. McLure, Jr., The Vatue-Added Tax: Key To Deficit Reduction? 176 (1987).Google Scholar
  15. 15.
    The author found a very easy way to evade the VAT at a McDonald’s in Paris. A VAT is charged on food that is consumed on the premises but not on food that is taken away. All one need do to evade the VAT is to declare that you are taking the food away at the time of purchase, then change your mind and sit down at a table after you have the food in-hand. Enforcement would require the hamburger police to be stationed at every McDonaid’s.Google Scholar
  16. 16.
    Is an antidandruff shampoo, for example, a medicine, and therefore exempt, or a cosmetic, and therefore taxable. French tax officials engaged in an extensive debate over this issue, as is pointed out in Weidenbaum and Christian,supra, at 5.Google Scholar
  17. 17.
    A.R. Prest, Value Added Taxation: The Experience of the United Kingdom 26 (1980).Google Scholar
  18. 18.
    In fact, it is not neutral, but it is not easy to predict where distortion will occur. The tax is paid by producers, but may be passed on to consumers in the form of higher prices. If it cannot be passed on, then profit margins suffer, shareholders must be content with a lower return on investment, and employment expands less rapidly. And a VAT may adversely affect some lines of business more than others. Any tax also has an adverse effect on economic growth, so it cannot truly be said that a VAT is neutral.Google Scholar
  19. 19.
    Graham Bannock,supra, at 8.Google Scholar
  20. 20.
    This view takes for granted that the ability to pay principle is to be preferred over the cost-benefit principle, which is questionable, at best. The ability to pay principle is discussed elsewhere in this book.Google Scholar
  21. 21.
    Weidenbaum and Christian,supra, at 10. The study they cite is Joel L. Prakken, The Macroeconomics of Tax Reform, in The Consumption Tax: A Better Alternative? (Charls E. Walker and Mark A. Bloomfield eds. 1987), at 117–166.Google Scholar
  22. 22.
    Graham Bannock,supra, at 24-25.Google Scholar
  23. 23 Richard A. Posner, Economic Analysis of Law 284–285 (5th ed. 1998).Google Scholar

Copyright information

© Springer Science+Business Media New York 2004

Authors and Affiliations

  • Robert W. McGee
    • 1
  1. 1.Andreas School of BusinessBarry UniversityMiami ShoresUSA

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