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Valued-added tax primer: What US companies should know about value-added tax May 16, 2011

Valued-added tax primer: What US companies should know about value-added tax

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Table of contents

Executive summary .................................................................................................................... iv

I. Introduction ...................................................................................................................... 1

II. Why a VAT may be considered in the United States over the next few years ....................... 2 A. Long-term fiscal imbalance ............................................................................................. 2 B. Tax system reform ......................................................................................................... 3 C. Current and past tax reform proposals............................................................................. 5

III. Types of VATs that could be considered in the United States .............................................. 8 A. Mechanics of subtraction-method and credit-method VATs ................................................ 8 B. Comparison of a VAT base to the corporate income tax base ........................................... 10 C. Macroeconomic effects of a VAT ................................................................................... 11 D. Border adjustments ..................................................................................................... 11

1. Mechanics of border adjustments ............................................................................ 11 2. Effects of border adjustments on competitiveness .................................................... 11

E. Lessons from the US states and from abroad: transaction or period-based taxes and frequency of filing ........................................................................................................ 12

IV. Overview of VATs abroad ................................................................................................. 14 A. Size and scope of VATs abroad ..................................................................................... 14 B. Upward drift in tax rates abroad .................................................................................... 17 C. Multiple rates and exemptions of VATs abroad ............................................................... 18

V. Implications for businesses ............................................................................................. 19 A. VATs can impose a variety of costs on businesses .......................................................... 19 B. Compliance costs ......................................................................................................... 19 C. Nonrecoverable costs for businesses ............................................................................. 21 D. Tax risk issues ............................................................................................................. 22 E. Financial accounting issues ........................................................................................... 22

VI. Industry-specific VAT issues ........................................................................................... 23 A. Financial services ........................................................................................................ 24 B. Flow-through businesses and real estate ........................................................................ 25 C. Manufacturing ............................................................................................................. 25 D. Technology ................................................................................................................. 26 E. Retailers ..................................................................................................................... 26 F. Residential housing ...................................................................................................... 26

VII. Political issues ................................................................................................................ 27 A. Political and business arguments for and against a VAT .................................................. 27 B. Add-on VAT and/or replacement VAT ............................................................................ 28 C. Distributional concerns ................................................................................................. 28 D. Transition issues .......................................................................................................... 28 E. State and local government concerns ............................................................................ 29 F. Small business concerns ............................................................................................... 29


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VIII. What to watch for ............................................................................................................ 30 A. Commissions and task forces issuing recommendations .................................................. 30 B. Increasing pressure for deficit reduction ........................................................................ 30 C. New legislative proposals with significant details of a VAT spelled out .............................. 30 D. Other countries increasing their VAT revenues ............................................................... 31

IX. How to stay informed ...................................................................................................... 32 A. Monitor policy discussions ............................................................................................ 32 B. Understand the issues generally and VAT issues specific to your industry ......................... 32 C. Understand how the proposals might affect your company, customers and suppliers ......... 32

X. Conclusion ...................................................................................................................... 33


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List of tables

Table 1. Recent proposals to reform the tax system ........................................................................ 6

Table 2. VAT rates for member nations of the OECD, 2010 ............................................................ 14

Table 3. VAT tax adoptions and rates for selected countries .......................................................... 16

Table 4. Effect of imperfect crediting on VAT liability .................................................................... 21

Table 5. Composition of valued added, by US industry, 2007 ......................................................... 24

List of figures

Figure 1. Historical and projected federal spending, revenues and deficits, 1960–2050 ..................... 3

Figure 2. United States more reliant on income taxes than other nations .......................................... 4

Figure 3. VAT rates abroad have risen over time ........................................................................... 17

Figure 4. VAT sales registration thresholds vary considerably among OECD countries ...................... 20

List of boxes

Box 1. How VATs work .................................................................................................................. 9

Box 2. An illustration of border tax adjustments ............................................................................ 12


Ernst & Young LLP | Page iv

Executive summary

The United States faces serious fiscal challenges over the next several decades as the federal deficit and debt are projected to rise to unsustainable levels. At the same time, many observers view the existing tax system as overly complex and an obstacle to economic growth. The debate over these issues has triggered discussion of a value-added tax (VAT) as a possible source of new revenue or as a replacement for a portion of the existing income tax.

While the national debate over how best to address the country’s fiscal imbalance will likely continue over the next several years, the possibility of enactment of a VAT in the United States raises a number of issues for companies, their industries and the markets in which they operate. Companies have a lot at stake depending on the breadth of a VAT’s tax base, tax rates, special rules that might apply to particular industries and the extent of transition relief. The effect of a VAT on companies and industries could differ markedly depending on whether they are capital- or labor-intensive, are import- or export-driven, or have significant existing capital investment when the VAT is enacted.

A VAT is fundamentally a tax on consumption. It could have significant effects on the demand for consumer products and services because of its likely effects on prices. A US VAT could also create substantial compliance challenges, as companies would need to comply with an entirely new tax. New systems would be needed to follow transactions and monitor VAT invoices for VAT paid on purchases. Companies with exports and/or imports would need to keep track of their international transactions.

Many companies with operations in other countries are familiar with these compliance issues, as they already pay a VAT abroad. Nearly 150 countries rely on VATs, and in these countries, VATs account for nearly one-fifth of total government revenue. When complying with VATs in other countries, companies face issues related to accounting, increased costs and increased tax risks. VATs abroad also continue to evolve and change as countries adjust their fiscal systems in response to competitive and other economic pressures.

Companies need to understand the details of how a VAT would actually operate in the United States and alongside VATs in other countries, in light of its possible consideration as part of the ongoing policy debate on how to address the national long-term fiscal imbalance. A VAT continues to be discussed in congressional hearings on tax reform and fiscal sustainability and may be included in tax and entitlement reform plans. As large deficits and government debt continue to rise, pressure for addressing these issues can only be expected to grow.

This paper provides background on VATs, focusing on how they operate, major design elements, political prospects, and key issues for businesses and industries.


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The United States remains the only major developed nation without a VAT.

I. Introduction

The United States remains the only major developed nation without a VAT. Nearly 150 countries impose VATs. While a VAT has been discussed periodically in the United States during the past four decades, it appears to be receiving more serious consideration as the nation faces difficult choices due to the large imbalance between what it spends and collects in revenue.

A VAT is similar to a retail sales tax in that it applies to goods and services sold to consumers and, therefore, is a tax on consumption. The two taxes, however, have an important difference. A retail sales tax is collected once on final sales to consumers, while a VAT is collected at every stage in the production and distribution chain. Also, a VAT may have somewhat less evasion than a retail sales tax because all collection is not concentrated at the retail level. As a general rule, VATs can be designed to either completely replace or add on to an existing tax system.

VAT revenue collected by the government is generally the difference between the gross tax on sales and gross credits for tax previously paid and may be only a small fraction of the gross cash flows involved. Small changes in the gross flows can have large effects on government collections and company VAT liabilities.

A VAT imposes collection obligations, and the associated compliance costs, across all firms. While compliance costs are spread across firms, total compliance costs under a VAT are generally higher than under a sales tax or even the corporate income tax.1 With an add-on VAT, overall compliance and administrative costs would be higher because the VAT would be a new, additional tax.

Multinational companies are already required to pay and comply with VATs in other countries. The international VAT landscape is ever-changing, as countries’ VATs evolve in response to competitive and other economic pressures.2 Countries impose VAT on different bases, with different tax rates and with different enforcement and administrative regimes.

As their operations continue to expand beyond the United States, multinational companies are increasingly aware of the risks and opportunities associated with complying with multiple VAT regimes. Countries have increased enforcement in this area, and in response, multinational companies are investing resources to manage their VAT liability, compliance costs and potential penalty risk.



Recent interest in a US VAT has been fueled primarily by concern over the rising US long-term deficit and growing federal debt.

II. Why a VAT may be considered in the United States over the next few years

Recent interest in a US VAT has been fueled primarily by concern over the rising US long-term deficit and growing federal debt. A VAT has the potential to generate substantial revenue that could be used to help address the nation’s long-term fiscal imbalance. Consideration of a VAT has also been part of broad tax reform discussions where the revenue from a VAT could be used to address issues with the current US income tax.

In 2010, two detailed legislative proposals were introduced, and three different fiscal panels examined ways to address the nation’s long-term fiscal imbalance.3 In 2011, Congress has been holding a series of tax reform hearings that are scheduled to continue throughout the year, and several tax reform proposals have been introduced. These efforts are part of a discussion and debate that will take several years and examine a wide range of policy alternatives. All options are on the table, including changes to the major entitlement programs (Medicare, Medicaid and Social Security), other changes to spending programs, new taxes — and perhaps a VAT.

A. Long-term fiscal imbalance

Federal spending continues to grow rapidly and outpace revenues. The deficit for fiscal year 2010 was $1.3 trillion and almost 9% of gross domestic product (GDP), the third highest since World War II. For the next 10 years, the deficit is projected to remain above 4% of GDP under the President’s proposed tax policies.

Moreover, the gap between what the government spends and what it raises in revenue is expected to widen over the next several decades (Figure 1). Government spending is projected to rise to 38.5% of GDP by 2040 and 53.7% by 2060. Revenues are expected to remain relatively stable at current levels, assuming the 2001/2003 tax cuts are permanently extended and the alternative minimum tax is indexed for inflation. Some have termed this widening fiscal gap the “entitlement problem” because it can be attributed primarily to the continuing growth in entitlement programs (primarily Medicare, Medicaid and Social Security).



Figure 1. Historical and projected federal spending, revenues and deficits, 1960–2050

Note: Projections are for the CBO’s alternative fiscal scenario, which assumes that health care spending, including Medicare’s payment rates to physicians, would gradually increase after 2020; discretionary spending would fall but not as much as under current law; the 2001 and 2003 income tax cuts would be extended; the reach of the alternative minimum tax would remain at historical levels; and tax revenues as a percent of GDP would stay constant. Sources: Congressional Budget Office, “The long-term budget outlook” (June 2010 — for projected data); Dept. of the Treasury, “Monthly Treasury statement (September 2010 — for FY2010 revenue and spending only); Office of Management and Budget, historical tables of the “President’s proposed budget for FY2011” (February 2010 — for historical data). This widening fiscal gap is a sharp departure in the relation of spending to the size of the economy since the end of World War II. Since 1950, spending has averaged 19.9% of GDP, and revenues have averaged 17.9% of GDP. Many observers think a change in both spending and taxes will be needed to address the fiscal imbalance.

B. Tax system reform

At the same time the fiscal imbalance is worsening, the United States also finds itself with a tax system that many view as increasingly complex, imposing substantial compliance burdens and presenting an obstacle to economic growth. The compliance burden of the income tax was reported to be $163 billion for 2008.4 About two-thirds of this compliance burden is borne by households, with the other third borne by corporations.5 In total, taxpayers spend about 6.1 billion hours annually complying with the tax system.6 Reducing the compliance burden through a simpler tax system has the potential to free up resources annually for use elsewhere in the economy.

Many economists have long asserted that income taxes lower economic growth by taxing the return to saving and investment. This “tax penalty” on saving and investment could manifest itself in many ways; for example, businesses might provide less equipment to workers or use older technologies and be slower to incorporate new technologies, thereby decreasing worker productivity, reducing real wages and, ultimately, lowering living standards. Many economists believe greater reliance on VATs or other consumption-type taxes could help improve economic performance.

The United States relies more heavily on income taxes as compared to consumption-type taxes to raise revenue than other major developed nations, even when taking into account state sales taxes in the United States (see Figure 2).

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45

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1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

% of GDP

Surplus

Deficit

Revenues

Spending

Revenues



Figure 2. United States more reliant on income taxes than other nations, 2008

Source: Organisation for Economic Co-operation and Development, 2010

One factor that may trigger increased interest in a VAT in the United States is the difficulty of raising substantially more revenue through the current income tax system. Higher tax rates may be problematic because they have been found to be damaging to the economy. A recent OECD study suggests that income taxes are among the least conducive types of taxes to economic growth,7 which may partly explain the growth of consumption-type taxes abroad.

Despite the perceived shortcomings of the income tax, one concern with a VAT is that reliance on this revenue source might increase over time. Some have observed that VATs abroad have generally grown over time, possibly enabling an increase in the size of government. One prominent study finds empirical evidence that more economically efficient tax systems contribute to an expansion of government,8 and another study lends some credence to the idea that reliance on a VAT leads to increased government spending.9

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3.0Ratio of income taxes to consumption taxes



C. Current and past tax reform proposals

In April 2011, Sens. Ron Wyden (D-OR) and Dan Coats (R-IN) introduced the Bipartisan Tax Fairness and Simplification Act of 2011. While the bill does not include an explicit consumption-type tax, it includes elements that would move the current tax system closer to a tax on consumption by expanding tax-free savings accounts, lowering the corporate tax rate to 24% and limiting interest deductions (see Table 1).

Also in April 2011, Rep. Paul Ryan (R-WI), as chairman of the House Budget Committee, introduced a budget plan that proposes significant reductions in spending and the broad outlines of a tax reform plan. His tax reform plan, which does not include a VAT, would lower the top corporate and individual tax rates to 25% with unspecified base-broadening sufficient to be revenue neutral over the 10-year budget window.

In 2010, Rep. Ryan introduced a detailed tax and entitlement reform proposal, the “Road Map for America’s Future” (the Road Map), which includes a VAT as a core element. In this proposal, the revenue from an 8.5% subtraction-method VAT would replace the corporate income tax. Proponents indicate their choice for a subtraction-method VAT was, in part, due to its similarity to the current corporate income tax. Supporters also say this structure would reduce new compliance costs for businesses. Rep. Ryan is expected to introduce a refined version of this proposal in 2011.

Towards the end of 2010, the President’s National Commission on Fiscal Responsibility and Reform (the Fiscal Commission) and the Bipartisan Policy Center’s Debt Reduction Task Force (the Debt Reduction Task Force) each put forward reform proposals to address the fiscal imbalance and reform the tax code. The Fiscal Commission’s proposal focused on lowering tax rates and broadening the base by limiting or eliminating many special tax provisions. The Debt Reduction Task Force’s proposal also lowered tax rates and broadened the tax base but included a 6.5% credit-method add-on VAT to raise additional revenue.

Other consumption-type proposals include the FairTax, a proposal to replace income and payroll taxes with a national retail sales tax; a 2007 Treasury Department analysis of a 5%–6% VAT to replace the corporate income tax; and analysis of a retail sales tax, a VAT and a progressive consumption tax by the 2005 President’s Advisory Panel on Federal Tax Reform.



Table 1. Recent proposals to reform the tax system

Reform plan Sponsor(s) VAT/consumption tax Business taxes Individual tax Bipartisan Tax Fairness and Simplification Act (2011)

Sens. Wyden (D-OR) and Coats (R-IN)

No consumption tax included but lowers the tax on the return to savings though expansion of tax-free savings accounts and lower corporate tax rate

► 24% corporate tax rate ► Faster write-off of

investment for small businesses

► Reduces deduction for interest expenses

► Eliminates deferral of foreign-source income (i.e., worldwide system)

► Three tax rates: 15%, 25% and 35% ► Triples standard deduction ► Retains many popular tax preferences

(e.g., home mortgage deduction, charitable deduction, child tax credit)

► 35% exclusion for capital gains/ dividends

► Expands tax-free savings vehicles ► Repeals the alternative minimum tax

(AMT) Path to Prosperity (2011)

Rep. Ryan (R-WI) No consumption tax included

► 25% corporate tax rate ► Sufficient base-broadening

to achieve revenue neutrality (i.e., raise revenues that equal roughly 19% of GDP over the 10-year budget window)

► Two tax rates: 10% and 25%

President’s National Commission on Fiscal Responsibility and Reform (2010)

Former Sen. Alan Simpson and Erskine Bowles (former chief of staff for President Clinton)

None ► 28% corporate tax rate ► Repeals all business tax

expenditures, including accelerated depreciation and research and experimentation (R&E) credit

► Territorial system for active foreign earnings; details unspecified

► Three tax rates: 12%, 22% and 28% ► Capital gains and dividends taxed as

ordinary income ► Eliminates most tax expenditures

except the earned income tax credit (EITC), child tax credit, reformed home mortgage deduction, charitable deduction, and employer-provided health insurance deduction (capped, then phased out)

► Repeals the AMT



Reform plan Sponsor(s) VAT/consumption tax Business taxes Individual tax Bipartisan Policy Center’s Debt Reduction Task Force (2010)

Former Sen. Pete Domenici and Alice Rivlin (former director of Congressional Budget Office and Office of Management and Budget)

6.5% debt reduction sales tax (operates as credit-method VAT); 1-cent per ounce excise tax on soft drinks

► 27% corporate tax rate ► Eliminates most business

tax expenditures; retains accelerated depreciation and expensing for R&E spending

► Retains deferral and worldwide system with foreign tax credit

► Two tax rates: 15% and 27% ► Capital gains and dividends taxed as

ordinary income ► Replaces home mortgage/charitable

deduction with 15% refundable credits; restructures EITC/child tax credit

► Caps and then repeals exclusion for employer-provided health insurance

► Repeals the AMT

Road Map for America’s Future (2010)

Rep. Ryan (R-WI) 8.5% subtraction-method VAT to replace the corporate income tax

► 8.5% subtraction-method VAT to replace the corporate income tax

► Two tax rates: 10% and 25% ► Large exemptions ($39,000 — family

of four) ► Eliminates most tax preferences ► Allows taxpayers to choose between

current tax system and new tax system ► No tax on dividends and capital gains ► Repeals the AMT ► Repeals the estate tax



III. Types of VATs that could be considered in the United States

Two types of VATs have been discussed in the United States: the subtraction-method VAT and the credit-method VAT, also known as the credit invoice-method VAT (see Box 1). The subtraction-method VAT has received attention in the United States because of its similarity to the current corporate income tax. The credit-method VAT, however, is used in virtually all 150 countries with a VAT. Japan is the only country that uses a subtraction-method VAT.10

A. Mechanics of subtraction-method and credit-method VATs

Under a subtraction-method VAT (sometimes referred to as a “business activity tax” or “business transfer tax”), the tax base for each firm is receipts from sales of taxable goods and services minus purchases of taxable goods and services from other businesses. Businesses aggregate their receipts, subtract permitted deductions and file a periodic return.

In contrast, under a credit-method VAT, the tax on intermediate inputs or production is eliminated differently. Instead of deducting purchases from other firms, each firm is fully taxed on its sales but also receives a credit for the tax paid by suppliers on the firm’s purchases, as shown on the suppliers’ invoices. Businesses remit tax on sales and claim refunds for tax previously paid. The credit method uses the invoices to show the VAT paid on purchases and charged on sales, which creates a paper trail that helps make the VAT more enforceable.



Box 1. How VATs work

Two types of VATs, subtraction-method and credit-method, are illustrated in the table below. A retail sales tax would collect $100 in revenue with a 10% sales tax on the final retail sale of $1,000. By contrast, a 10% VAT collects $30 from the manufacturer, $40 from the wholesaler, and $30 from the retailer. Under either the retail sales tax or VAT, the same $100 is collected on the $1,000 sale to the final consumer.

Different, but economically equivalent, ways of taxing consumption

Economic activity Manufacturer Wholesaler Retailer Total 1. Sales $300 $700 $1,000 2. Purchases $0 $300 $700 3. Labor $200 $200 $200 4. Value-added (sales-purchases) $300 $400 $300 $1,000 Retail sales tax 5. Retail sales tax (10% of line 1

retail sales) $0 $0 $100 $100

Subtraction-method VAT 6. Subtraction-method VAT (10% of

line 4) $30 $40 $30 $100

Credit-method VAT 7. Tax on sales (10% of line 1) $30 $70 $100 8. Less: input tax on purchases $0 $30 $70 9. Net VAT liability $30 $40 $30 $100 Source: Robert Carroll and Alan Viard, “Value-added taxation: basic concepts and unresolved issues,” Tax Notes, 1 March 2010, pp. 1117–1126.

Both the credit-method VAT and subtraction-method VAT collect the same amount of tax overall and at each stage of production. Under the subtraction method, each firm subtracts its pretax purchases from its pretax sales and pays tax on the difference. Under the credit method, each firm subtracts tax previously paid when determining how much tax to remit to the government.

Although arithmetically equivalent in theory, the credit method, unlike the subtraction method, can result in over-taxation (tax cascading) if exemptions are provided before the retail stage. Consider the example above where the wholesaler is exempt from VAT (perhaps because it is a small firm).

The exemption causes no conceptual difficulties under the subtraction method beyond the revenue lost. In contrast, a wholesaler exemption creates significant problems under the credit method. The manufacturer pays $30 in tax, the wholesaler pays zero tax, but the retailer now pays $100 in tax. The retailer cannot claim any credit, because the wholesaler, from which it makes its purchases, does not pay any tax, and the total tax collected rises to $130. The exemption, in effect, breaks the VAT chain and increases the total burden on the final consumer good.

In contrast, however, the subtraction method, unlike the credit method, cannot easily accommodate multiple tax rates. Suppose, for example, that the VAT imposes a 5% tax rate on TVs and a 10% tax rate on cars at the retail stage. Under the credit method, the appropriate tax rate is applied to the final product at the retail stage. The retailer claims full credit for the taxes collected at the manufacturing and wholesale stages, and those taxes do not affect the total tax burden on the final product.

But the subtraction method runs into problems, because the tax at each stage of production is computed separately and there is no practical way to vary the tax rate at the earlier stages based on the final product. The inability of the subtraction method to accommodate the multiple rates used by most countries helps explain the prevalence of the credit method.



B. Comparison of a VAT base to the corporate income tax base

A VAT base differs from the current corporate income tax base in several important ways. This point is clearest with a subtraction-method VAT but also applies to a credit-method VAT.

First, a VAT applies to all businesses, not just C corporations. The tax base would include the value added of all businesses, although many countries exempt small businesses from the VAT due to high compliance costs.

Second, under a VAT, businesses deduct all purchases from all other businesses. This means that businesses write off or expense all investment immediately. This includes not only all equipment but also buildings and other structures. A VAT allows a full deduction for the cost of new investment and then taxes the return to this investment over its life.

Third, under a VAT, businesses would not deduct wages or other worker compensation. Unlike under the corporate income tax, worker compensation is included as part of the VAT base and is therefore taxed. Economy-wide, roughly two-thirds of value added is actually workers’ wages and other compensation. This is one reason why a VAT is generally thought to be regressive, meaning it is borne disproportionately by low-income and moderate-income households. A VAT is, in large part, similar to an employer tax on worker compensation.

The combination of the first two points explains how some businesses might be affected by a VAT. If a firm’s value added arises primarily from workers’ contribution to production, that firm will tend to remit more VAT than a firm that has substantial investment in equipment and structures (i.e., tangible property). Labor-intensive firms, such as personal service companies, will remit more VAT than capital-intensive firms, such as manufacturing companies.

Fourth, income and expenses related to financial intermediation are generally excluded from the VAT base. This means that companies neither include interest income nor exclude interest expenses from net income for VAT purposes. This feature of a VAT can have large effects on the VAT remitted by firms active in financial intermediation or heavily reliant on debt financing.

Fifth, firms with little or no income tax liability may have substantial VAT liability and vice versa. The VAT base, in simplest terms, is defined as receipts less purchases from other businesses and could be quite large even if a firm is not currently profitable. For example, a firm with large interest expenses might be unprofitable but may pay substantial VAT. Alternatively, a firm that is profitable from an income tax perspective might have little or no VAT (or even be in a refund position) if it is making large capital purchases. Because capital expenditures are expensed, they can drive VAT liability down in anticipation of future profits.

Finally, VATs are typically border adjustable, with exports exempt but imports taxable. While, as discussed below, adjustments in exchange rates may mitigate the aggregate effects of border adjustments on the US balance of trade, VATs are likely to have near-term and potentially longer-lasting effects on companies and industries.



The introduction of a VAT could have significant macroeconomic effects on the economy.

C. Macroeconomic effects of a VAT

The introduction of a VAT could have significant macroeconomic effects on the economy. In the near term, it is anticipated that the introduction of a VAT would likely lead to a one-time increase in prices equal to the VAT. The increase in the price level would depend on whether the Federal Reserve Board accommodates the VAT by expanding the money supply to allow the price increase.11

Under this scenario, a comprehensive 10% VAT would mean a one-time 10% increase in prices. To the extent a substantial portion of consumption is excluded from the VAT base,12 the overall effects on the price level would be smaller, and the differential effects on types of household consumption could be large. For example, a recent Ernst & Young LLP study of an add-on VAT for the National Retail Federation found that a 10.3% narrow-based VAT would initially reduce taxable retail spending by 5% but would reduce total household consumption by only 1.6% and would increase non-taxable retail spending by 0.8%.13

In the near term, a VAT could be expected to have substantial effects on the timing of consumer spending. An add-on VAT would raise the cost of consuming and likely cause consumers to accelerate their consumption to precede the effective date of the higher tax.

In the longer term, a VAT could be expected to have favorable effects on the overall economy by replacing the corporate income tax or reducing large government deficits, by encouraging greater saving and investment and capital formation, and by increasing labor productivity and, ultimately, real wages and living standards.

D. Border adjustments

An important consideration is whether a VAT could be used to foster US exports. Many hold the view that border adjustments, whereby VAT is imposed on imports but not exports, will encourage exports and help improve the balance of trade. Economists view this position with skepticism. Also, there may be some uncertainty as to the permissibility of border adjustments under the World Trade Organization (WTO)/General Agreement on Tariffs and Trade (GATT) for a subtraction-method VAT.

1. Mechanics of border adjustments

VATs are typically levied on a destination basis, with goods taxed where they are consumed. A destination-based VAT taxes imports but not exports (i.e., it taxes what is consumed within a country). Border adjustments are used to implement a destination-based VAT. A refund is received for the VAT paid on business purchases used in the production of exported goods, and VAT is imposed on imports. In contrast, an origin-based VAT taxes goods where they are produced, taxing exports but not imports.

2. Effects of border adjustments on competitiveness

Border tax adjustments are commonly perceived as providing a trade advantage, although many economists argue that adjustments do not improve the balance of trade in the aggregate. Any apparent cost advantage would be offset by differences in the real price levels across nations as reflected through changes in exchange rates or in other prices. These price adjustments work over time to negate any permanent improvement in the balance of trade (see Box 2).



While there may be no significant long-term effects on a nation’s balance of trade, effects on specific industries and markets are likely, especially if the VAT excludes many consumption items, as VATs in other countries generally do.

E. Lessons from the US states and from abroad: transaction or period-based taxes and frequency of filing

Several US states have experience with VATs. New Hampshire has had a Business Enterprise Tax (BET) since 1993, and Michigan had a Single Business Tax (SBT) until 2008.14 A Business Net Receipts Tax (BNRT) was recently proposed, but not enacted, in California as part of a broad reform that would, among other things, have eliminated most of California’s sales tax and all of its corporate income tax.15

These consumption-type taxes are applied to each firm’s value added, but each does this calculation in different ways. Both the Michigan SBT and the New Hampshire BET compute value added using addition-method VATs, whereby businesses simply add up the components of value added (wages, rents, interest, etc.). The California BNRT proposal was for a subtraction-method VAT computed as the difference between a firm’s receipts less purchases from other businesses. In both cases, investment expenditures are not subject to VAT.

Box 2. An illustration of border tax adjustments

To illustrate the argument that border tax adjustments do not improve the balance of trade, consider a simple example. Assume that the United States imposes a 25% origin-based consumption tax and that it exports 100 of X-goods at $10 each and imports from Europe 100 of M-goods at $10 each. Trade is balanced, exports and imports equal $1,000, and the exchange rate is €1 per dollar. US producers charge $10 for each X-good and clear $8 after tax. European producers charge €10 for each M-good exported to the United States and clear €10.

Assume that the United States decides to border-adjust its tax system and imposes a 25% tax on imports and rebates the 25% tax previously imposed on exports. With the border adjustment, exports are tax-free. As a result, US producers need to charge only $8 for each X-good to receive $8, while European producers need to charge €12.5 to receive €10 for each M-good exported to the United States. If exchange rates did not change, the lower price for US exports would increase the number of X-goods purchased abroad, and the higher price for M-goods would reduce imports purchased by Americans. However, this situation cannot persist indefinitely because the number of dollars demanded by Europeans would have increased (because Europeans will desire more X-goods) while the number of dollars supplied by Americans would have fallen (because Americans will desire fewer M-goods).

To restore balance in the foreign exchange market, the value of the dollar must rise by 25% to €1.25. At the new exchange rate, the number of dollars demanded and supplied returns to balance. US producers charge $8 for X-goods, which translates to €10 at the new exchange rate, and exports of X-goods stay at their original level.

European producers charge €12.5 for M-goods sold in the United States, which translates to $10 at the new exchange rate, and US imports remain at their original level. Absent flexible exchange rates, the real price level across nations would still adjust to achieve the same result, although the adjustment process might well take longer. Through the adjustment process, trade would ultimately be unaffected by the border adjustments although there could be real trade effects during the adjustment period.



The difference between these state-level VATs and the VATs imposed abroad is much more significant. The foreign VATs are credit-method VATs, which in some countries are referred to as a Goods and Services Tax (GST). In addition, the foreign VATs are transaction-based taxes. They apply the tax to firm sales, allow credits for taxes paid on purchases from other businesses and require companies to account for all business transactions in real time as they occur.

Japan deviates from the international norm by operating a VAT with subtraction-method features.16 The Japanese VAT uses an annual accounting period, and taxpayers subject to the Japanese VAT derive the amount of the VAT paid from their total purchases from domestic entities, rather than from the VAT paid as shown in a credit-invoice method.

The state VATs discussed above are more similar in structure to the corporate income tax, with periodic tax returns filed that tie tax liability to income concepts for a specific period (i.e., a tax year). The transactional-based VATs abroad, with the exception of Japan’s VAT, are more similar to transactional-based sales taxes.

Despite the various names and forms of these taxes, they are all taxes on a firm’s value added, and they all tax consumption.



Among the nearly 150 countries that have implemented VATs, the VATs account for nearly one-fifth of total government revenue.

IV. Overview of VATs abroad

A. Size and scope of VATs abroad

Among the nearly 150 countries that have implemented VATs, the VATs account for nearly one-fifth of total government revenue. The United States is the only major developed nation without a VAT. As shown in Table 2, the average VAT rate among member nations of the OECD in 2011 was 18.5%. Japan has the lowest VAT rate (5%), while several countries have combined federal/sub-national rates approaching 40% (e.g., Austria, Norway, Sweden). The rates have also risen over time. The average VAT rate for the OECD’s 13 countries with VATs in 1976 rose from 16% to 20.5% in 2011. Not only is there considerable variation in the top-line VAT rates across countries but also in the breadth of their tax bases and the use of multiple rates to address distributional concerns.

Table 2. VAT rates for member nations of the OECD, 2011

Federal VAT rates Year

implemented Standard

rates Reduced rates*

Select sub-national rates

Australia 2000 10 0 — Austria 1973 20 10/12 19 Belgium 1971 21 0/6/12 — Canada 1991 5 0 13 Chile 1975 19 — — Czech Republic 1993 20 10 — Denmark 1967 25 0 — Finland 1994 23 0/9/13 — France 1968 19.6 2.1/5.5 — Germany 1968 19 7 — Greece 1987 23 6.5/13 3/6/13 Hungary 1988 25 18/5 — Iceland 1989 25.5 0/7 — Ireland 1972 21 0/4.8/13.5 — Italy 1973 20 0/4/10 — Japan 1989 5 — — Korea 1977 10 0 — Luxembourg 1970 15 3/6/12 — Mexico 1980 16 0 11 Netherlands 1969 19 6 — New Zealand 1986 15 0 — Norway 1970 25 0/8/14 — Poland 1993 23 0/5/8 — Portugal 1986 23 6/13 4/8/14 Slovak Republic 1993 20 10 — Spain 1986 18 4/8 —



Federal VAT rates Year

implemented Standard

rates Reduced rates*

Select sub-national rates

Sweden 1969 25 0/6/12 — Switzerland 1995 8 0/2.5/3.8 — Turkey 1985 18 1/8 — United Kingdom 1973 20 0/5 — Average 18.5

*A number of countries apply a domestic zero rate (or an exemption with right to deduct input tax) on certain goods and services. This is shown as 0 in this table. This does not include zero-rated exports. Source: “Indirect Tax in 2011: A review of global indirect tax developments and issues,” Ernst & Young LLP, 2011; and Organisation for Economic Co-operation and Development. A general overview of the VAT tax systems for 10 large OECD economies that have adopted the tax is provided in Table 3.17 Nine of the countries use a credit-method VAT, while Japan uses the subtraction method with a single tax rate of 5%. The table shows the year of adoption, as well as original and current tax rates.

Most of the countries listed in Table 3 adopted VATs that, at least initially, replaced existing turnover or sales-type taxes collected at the wholesale or manufacturing level. Their VATs replaced what was viewed as relatively inefficient turnover taxes with considerable cascading and uneven taxation of consumption.

The multiple-rate VAT systems generally reduce the regressivity of the tax using two types of adjustments: zero rating and exemption.

Zero rating: if a product or service is zero rated, sellers do not charge VAT on their sales, but they do get credits for any VAT paid on their purchases. This effectively removes the full VAT from the sale of the product or service.18

Exemption: if the sale is exempt, the seller does not collect tax on the sale, but the seller does not receive any credits for the VAT paid on input purchases. In this case, VAT on earlier stages will be embedded in the sales price of the good or services (assuming full forward shifting).

While zero rating can fully remove the VAT from specific goods and services, exemption results in only a partial reduction in the VAT. While zero-rating and exemptions reduce the regressivity of the tax, they result in a more complex tax that creates differential taxation of goods and services and adds substantial costs of administration and compliance.



Table 3. VAT tax adoptions and rates for selected countries

Type of VAT Date

enacted Initial

general rate Current general

rate VAT as percentage

of GDP Type of tax replaced Additional information France Credit invoice 1954 16.66% 19.6% 7.2% Turnover tax Applied to services in 1968;

peak rate of 20.6% in 1999 Germany Credit invoice 1968 10% 19% 6.3% Turnover tax Ireland Credit invoice 1972 16.37% 21% 7.9% Turnover tax Peak rate of 25% in 1989;

22% rate in 2013 and 23% rate in 2014

Italy Credit invoice 1973 12% 20% 6.3% General tax on consumption (IGE)

United Kingdom Credit invoice 1973 10% 20% 6.7% Selective employment purchase taxes

Rate was 15% in 2009; 17.5% in 2010; 20% in January

2011 Spain Credit invoice 1986 12% 18% 6.4% 23 indirect taxes Rate increase from

15% in January 2010 New Zealand (GST) Credit invoice 1986 10% 15% 9% Wholesale sales tax Rate increased to

15% in October 2010 Japan Subtraction 1989 3% 5% 2.6% Selective excise taxes Canada (GST) Credit invoice 1991 7% 5% GST;

12% to 15% HST 3.1% Federal manufacturers’

sales tax HST is combined federal and

provincial tax (nine provinces) Australia (GST) Credit invoice 2000 10% 10% 3.9% Wholesale sales tax Source: “Indirect Tax in 2011: A review of global indirect tax developments and issues,” Ernst & Young LLP, 2011; OECD, “Consumption tax trends 2008” (November 2008);,European Commission, “VAT rates” (May 2010).



B. Upward drift in tax rates abroad

VAT rates and associated revenue have increased substantially over time (Figure 3). With the increase of the general VAT rate from 17.5% to 20% in January 2011, the United Kingdom is the first country shown in Table 3 to double its tax rate since adopting a VAT. Germany follows closely with a 90% rate increase since the inception of its VAT. The 10 countries listed in Table 3 have increased their VAT rates by nearly 50% since they adopted VATs.

Various efforts to analyze and consider a US VAT over the past four decades have cited the possibility that a VAT would grow over time and potentially enable an increase in the size of government.19

Figure 3. VAT rates abroad have risen over time

Source: “Indirect Tax in 2011: A review of global indirect tax developments and issues,” Ernst & Young LLP, 2011; OECD, “Consumption Tax Trends 2008” (November 2008); and European commission, “VAT Rates” (May 2010).

0%

5%

10%

15%

20%

25%

France Germany Ireland Italy United Kingdom

Spain New Zealand

Japan Canada Australia

Initial rate Current rate (2011)



C. Multiple rates and exemptions of VATs abroad

Some have deduced from the VAT experience in other countries that it is almost impossible to adopt a simple, broad-based, single-rate VAT that would, in practice, minimize economic distortions and administrative and compliance costs.

Most countries, concerned about the regressive nature of VATs (whereby VATs are borne disproportionately by low-income and moderate-income households because consumption comprises a larger fraction of their incomes), have included numerous exemptions and multiple tax rates in their VATs. Standard VAT exemptions among OECD countries include health care, education and financial services. For this reason, most VATs could more accurately be termed “partial” VATs.20 In practice, the VATs among OECD countries, on average, include roughly 60% of personal consumption expenditures in their bases.21

The use of multiple rates and exemptions comes at a significant cost. These items increase administrative and compliance costs for both tax agencies and taxpayers and distort economic decisions. For the nine countries included in Table 3 that use a credit-invoice method VAT, the hours needed to comply with consumption taxes (primarily their VATs) exceed the hours needed to comply with the corporate income tax by 26%.22

Non-compliance is also a significant by-product of the complexity introduced by multiple rates and exemptions. A study of VAT compliance in the EU found that, on average, the VAT gap in 2006 was 12% of the potential tax liability, translating into a total gap of 106 billion euros. The estimated VAT gap ranged from 30% in Greece to 2% in Ireland.23

These studies suggest that, in practice, the credit-invoice method VAT is not a self-enforcing tax system, in which the presence of invoices ensures voluntary compliance. Rather, it is a transaction-based tax on very large gross flows producing much smaller net tax collections, requiring substantial tax agency resources and imposing significant compliance costs on businesses.



The revenue from a VAT could be used to reduce the deficit.

V. Implications for businesses

A VAT would affect business in a number of different ways. It would have broad effects on the economy, which could affect the cost of business inputs, the price a business charges for its products or the value of a firm. For example, addressing the large federal deficit and growing federal debt with a VAT may reduce long-term interest rates, thereby lowering businesses’ financing costs. There is also likely to be a one-time increase in prices and a reduction in consumption of those goods and services included in the VAT base.

A VAT would also impose a number of new costs on businesses. Compliance costs would be higher. Non-recoverable costs could result from the lack of complete crediting, for example, and there could be new tax risks related to audits and reporting errors. VAT revenue, however, could be used to reform the current tax system by reducing the corporate tax rate.

A. VATs can impose a variety of costs on businesses

The textbook VAT is often viewed as a tax on consumption. Its similarity to a retail sales tax, whereby prices are viewed as rising by the amount of the tax, reinforces this view.

In practice, VATs are typically not imposed broadly on all consumption nor at a single rate. To the extent a substantial portion of consumption is excluded from the VAT base, the rise in the price level would be less than 10%, and differential effects would likely occur across various markets and products depending on the specific design of the VAT. As discussed above, most countries with VATs exempt or zero-rate many goods and services, including health care, education and financial services.

The partial nature of most VATs creates uneven taxation, with some goods and services taxed at higher rates than others. The uneven taxation flows through to companies’ sales. Companies operating in markets that are more heavily taxed are likely to see their sales fall as consumers respond to the higher rates of tax applied to their goods and services.

Over the longer term, an add-on VAT could have other effects. The revenue from a VAT could be used to reduce the deficit, putting downward pressure on long-term interest rates as deficit-financed government spending is replaced with VAT-financed government spending and deficits that used to crowd out private saving are reduced. Lower long-term interest rates would reduce the borrowing costs of businesses. Moreover, because the VAT is a tax on consumption, not on saving or investment, the VAT could make saving and investment relatively more attractive for households and businesses. This could further increase household saving, business investment and, ultimately, economic output. However, the rise in prices would also likely lower consumer spending.

B. Compliance costs

An add-on VAT, or a VAT that only reduced but did not replace the corporate income tax, would require businesses to comply with an entirely new tax. Businesses would have to collect the VAT on behalf of the government, keep and maintain records of their VAT payments and collection, and prepare VAT returns. The extent of these costs would be based on factors such as the number of transactions



involved, the complexity of the VAT base, rate structure, definitions, and administrative and enforcement regime. Also, for an add-on VAT, businesses would have to continue to comply with the federal and state corporate income taxes, as well as state retail sales taxes.

Large multinational enterprises currently need to manage their VATs from a global perspective. They need to comply with VAT systems that vary, sometimes substantially, from one country to another. Countries impose VAT on different bases, with different rate structures, definitions, administrative and enforcement regimes, and registration requirements.

Surprisingly, there is little research on the actual compliance costs businesses face under a VAT. A 1992 CBO study reported that VAT compliance costs were substantial, especially for small businesses.24 In an analysis of the United Kingdom’s VAT from the late 1980s, the CBO estimated that the cost for complying with a VAT with a $25,000 small business exemption would be between $4 billion and $7 billion (in 1988). The CBO estimated that about 90% of that cost would be incurred by businesses with annual sales of less than $1 million. A 1998 study of Washington state’s sales and use tax found that the compliance burden for small firms was more than six times that of large firms.25

Because VAT compliance costs can be high, small businesses are often exempted from registering for VATs, but as shown in Figure 4, the sales thresholds vary considerably across countries, adding to the complexity faced by companies operating in many countries.

The start-up costs for businesses to comply with a new VAT could be considerably more substantial than suggested by the experience in the United Kingdom in the late 1980s. A subsequent Ernst & Young LLP study of the implementation of Australia’s GST estimated the start-up costs for the largest corporations to be 0.75% to 1% of annual revenue and 10% of annual revenue for small businesses.26

Figure 4. VAT sales registration thresholds vary considerably among OECD countries

Source: Organisation for Economic Co-operation and Development, 2010.

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Registration/collection thresholds (USD), 2010



C. Non-recoverable costs for businesses

Under a VAT, businesses act as tax collectors. In addition to the compliance costs, businesses may often bear extra costs associated with VATs. A business is liable for VAT on its gross receipts but receives credits for VAT previously paid on purchases. Businesses have found that, in the United Kingdom, the tax on these gross flows — the tax on gross sales and the credits on purchases — has been 10 times the net VAT collected.27 There may be circumstances in which VAT crediting may be incomplete, which would impose a direct tax cost on businesses and might be difficult to pass on to consumers. Because the gross flows are so large, imperfections in the VAT system can be greatly amplified.

Consider the simple example shown in Table 4 (recreated from the table in Box 1). Under the credit-method VAT, each business pays tax on sales but receives a credit for VAT previously paid on its purchases. In the standard case, each business pays tax according to its value added. The wholesaler, for example, pays $40 in VAT computed as $70 of tax on sales, less the VAT credit of $30 for tax previously paid on its purchases. If, for some reason, the wholesaler is not able to claim the credit, the tax would rise to $70, with a substantial effect on the taxes paid by the wholesaler and the aggregate level of VAT revenue.

Table 4. Effect of imperfect crediting on VAT liability

Economic activity Manufacturer Wholesaler Retailer Total VAT

Sales $300 $700 $1,000 Purchases $0 $300 $700 Labor $200 $200 $200 Value added (sales-purchases) $300 $400 $300 $1,000

Standard credit-method VAT

Tax on sales (10%) $30 $70 $100 Less: Credit for VAT previously paid 0 (30) (70)

Net VAT liability $30 $40 $30 $100

With imperfect crediting

Tax on sales (10%) $30 $70 $100 Less: input tax on purchases 0 0 (70)

Net VAT liability $30 $70 $ 30 $130 Source: Modified from Robert Carroll and Alan Viard, “Value-Added Taxation: basic concepts and unresolved issues,” Tax Notes, 1 March 2010, pp. 1117–1126. The more complex a VAT, meaning the more exemptions and greater use of multiple rates, the more likely that businesses will have difficulties. Mischaracterizing sales items (i.e., applying the wrong rate) can affect credits for businesses downstream. Different jurisdictions or countries may have different requirements for substantiation of invoices that can affect the ability of businesses to claim credits. There may also be issues related to the timing of VAT taxes and credits. Delays in the issuance of invoices can affect the timing of businesses’ claims for credits against their VAT taxes. This can create variability in net tax payments over time and affect the cash flow of a company. Delays in issuing invoices to businesses further down the production chain could also have implications for other businesses.



The wide range of VAT rules in effect in different countries makes accurate VAT reporting challenging for multinational enterprises.

D. Tax risk issues

The wide range of VAT rules in effect in different countries makes accurate VAT reporting challenging for multinational enterprises. Errors can arise on the classification of both sales and purchases, especially for activities that are subject to different rules in different countries. In some cases the taxpayer may need to rely on third-party information (e.g., customers), which may be difficult to verify. Alternatively, there may simply be genuine uncertainty about the correct VAT treatment of a transaction and whether, where and even when VAT is due.

Uncertainty may lead to errors and disputes with the taxing authority. In many countries penalties relate to the number of incorrect invoices issued, regardless of the impact of the error on revenue. Large penalties may accrue even for minor mistakes or where there is no net tax lost to the government.

Under a VAT, the gross taxes paid by firms plus refunds returned to firms are very large relative to the net taxes collected by the government. The large cash flows involved amplify many of the concerns outlined above.

Generally, the lack of harmonization across countries’ VATs, as well as their different approaches to administration and enforcement, raises compliance burdens and increases tax risks to companies. Greater harmonization of VAT rules across a number of dimensions, such as VAT reporting, VAT invoicing formats, VAT rules for cross-border trade to avoid double taxation, and more centralized and coordinated VAT registration, would help reduce the disparities across nations’ VATs. Companies can respond to the wide range of VAT regimes by approaching VAT compliance globally with standardization of return processes and documentation, greater automation, greater oversight and active monitoring of VAT changes.28

E. Financial accounting issues

A VAT also raises issues that businesses would need to consider from a financial accounting perspective. If an entity is uncertain as to whether it has complied with the VAT law, that uncertainty has to be evaluated when the entity undertakes its financial accounting. Because a VAT is not based on income, uncertainties related to a VAT would need to be evaluated under Accounting Standards Codification (ASC) 450, Contingencies, and not ASC 740, Income Taxes. Some important considerations when evaluating an uncertainty related to a VAT include materiality to the financial statements and whether a claim has been asserted by the taxing authority. Practice has generally developed that because a return is required to be filed (whether or not a return is actually filed), a claim is asserted.

Businesses would need to develop and implement processes and controls around a VAT to facilitate accurate and timely VAT reporting, including consideration of reporting systems to ensure the capability to properly capture, process and analyze data. Exposure-prone issues in the VAT area include failure to register for the VAT, VAT liabilities through in-country presence of a subsidiary, paying non-recoverable VAT on goods imported on behalf of customers or improperly classifying goods.

Because the issues in this area are complex, taxpayers should consult with their advisors for guidance specific to their situation.



A VAT also raises a number of issues for particular industries. Some industries would pay more VAT than others depending on their capital intensity, type of finance and whether they are export-driven.

VI. Industry-specific VAT issues

A VAT also raises a number of issues for particular industries. Some industries would pay more VAT than others depending on their capital intensity, type of finance and whether they are export-driven. As shown in Table 5, value added is considerably larger than corporate profits, the basis for the corporate income tax. The larger size partially reflects the fact that about two-thirds of value added reflects workers’ wages. Thus, labor-intensive companies and industries would generally pay more VAT than capital-intensive industries and more than they would in corporate income tax. There are also special issues that arise for certain industries, such as financial services, and particular sectors, such as the flow-through or non-corporate sector.

The distribution of value added is considerably different than corporate profits. The manufacturing sector comprises 36% of corporate profits but only 8% of value added. The actual corporate tax and value-added tax bases would likely differ substantially due to the various tax provisions that would in practice narrow these bases.

If VAT revenue were used to lower the corporate tax rate (i.e., with a partial replacement VAT), the effects of the lower corporate tax rate could benefit many firms. Firms with substantial foreign operations might see their competitive position improve relative to foreign firms, as the US corporate rate becomes more closely aligned with the international norm. Foreign earnings could be repatriated back to the United States at the new lower corporate tax rate. Firms with large deferred tax assets, however, might see a large reduction in the value of those assets.



Table 5. Composition of valued added, by US industry, 2007

Corporate profits Value added* Private industries $Billions Percent $Billions Percent Agriculture, forestry, fishing and hunting 3 0% 70 1% Mining 49 4% 55 1% Utilities 42 3% 143 2% Construction 17 1% 609 7% Manufacturing 451 36% 701 8% Wholesale trade 82 7% 632 8% Retail trade 84 7% 823 10% Transportation and warehousing 19 1% 224 3% Information 95 8% 463 6% Finance, insurance, real estate, rental and leasing** 222 18% 1,445 17% Professional and business services 149 12% 1,427 17% Educational services, health care and social assistance 11 1% 925 11% Arts, entertainment, recreation, accommodation and

food services 19 2% 467 6% Other services, except government 3 0% 331 4% Total private 1,246 100% 8,315 100%*** *Excludes exports. Taxes on imports are assumed to be remitted by foreign companies importing to the United States. **Less imputed rental value of owner-occupied housing ***Total does not foot due to rounding. Source: Bureau of Economic Analysis.

A. Financial services

The taxation of financial services poses a special challenge for consumption-type taxes, such as a VAT. VATs typically treat most financial services as exempt, but it is widely recognized that this approach is problematic. Exemption may well pose additional issues for the United States because of the large size of the financial services sector and the importance of financial intermediation to its economy. As shown in Table 5, financial services and insurance (and real estate) comprise about 17% of total value added in the United States.

Conceptually, consumption tax principles suggest that all financial services should be included in the tax base to the extent they are provided to households (i.e., consumed) but not to the extent they are provided to businesses. Financial services firms, such as banks, act as financial intermediaries and earn income as the difference between what they charge borrowers and pay depositors. This difference reflects the “price” charged for providing financial intermediation services. Consumption tax principles indicate that if such services are provided to consumers, they should be included in the consumption tax base, but if they are provided to businesses, they should not.

Experts say problems arise because the way in which financial institutions, such as banks, price their services makes it difficult to include such services in the tax base.29 A financial institution can be thought of as charging implicit fees to borrowers and depositors for financial intermediation services equal to the interest rate spread. Many believe the implicit fees charged to both borrowers and depositors should be deductible expenses for businesses but included in the tax base and taxable for consumers. However, many countries generally exclude financial services — both income and expenses — from their VAT tax base entirely. This leads to over-taxation for business customers because they do not get to claim a credit for the implicit cost of financial intermediation services they purchase and under-taxation for consumers because they are not taxed on their consumption of such services.



Various regimes have been considered for proper taxation of financial services, but all require the unbundling of financial services in some manner and drawing distinctions between financial services and other types of transactions or firms. Some countries impose additional compensating taxes, such as insurance premium taxes, in addition to exemptions. Other countries may have been able to exempt financial services because of the industry’s relatively small size in relation to their economies, but the larger size of this sector in the United States makes developing a more complete approach more important.

The IMF has proposed a Financial Activities Tax (FAT) on the profits and remuneration of financial institutions.30 Depending on the precise design, the FAT would effectively be a tax on the valued added of the financial services industry. The IMF report describing the FAT suggested that the exemption of this sector from VATs in most countries may have led to the under-taxation of this sector but that this could be remedied through adoption of a FAT.

B. Flow-through businesses and real estate

Flow-through businesses are an important part of the US economy.31 The vast majority of businesses in the United States operate as flow-through entities, with 54% of business net income reported by and 44% of all business taxes paid by individual owners of flow-through entities on their flow-through profits.32

The US tax system may be unique among those of developed nations in providing highly flexible ownership structures and legal forms to meet the specific organizational and capital requirements of businesses and particular industries. The flow-through sector tends to be markedly smaller in most other developed nations.33 The real estate industry, for example, with its diffuse and decentralized ownership structures, is heavily reliant on the flow-through form of business operations.

A VAT would be an entirely new tax for flow-through businesses. The practice among many countries abroad is to exempt businesses with gross receipts below a certain size from the VAT (for example, see Figure 4). This is driven more by concerns about compliance costs for smaller businesses than by any significant challenges for businesses operating in the flow-through form.

C. Manufacturing

Manufacturing firms could be greatly affected by a VAT. As shown in Table 5, the manufacturing industry’s fraction of value added is only 8%, as compared to 36% of overall corporate profits. The effects on particular firms depend primarily on their capital structure and their capital intensity, but other considerations, such as whether they are export-driven or whether the VAT is an add-on or partial replacement tax, also matter. Capital-intensive firms would be able to deduct (or receive a credit for) all new investment. This could have a large, positive effect on their tax situation in the near term. However, the positive effects would be mitigated if the investment was debt-financed because interest expenses would not be deductible under the VAT. Labor-intensive firms might pay more in tax because wages (and other compensation) would not be deductible.

A somewhat different set of considerations would come into play if the VAT was used to partially replace the corporate income tax. All C corporations would benefit from a lower corporate tax rate. Exporters might perceive a benefit since exports would not be subject to a VAT with border adjustments, but overall effects might depend on whether prices in the United States rise relative to those abroad upon enactment of the VAT. Similarly, importers might perceive a disadvantage as they would pay VAT on imports, but overall effects might again depend on whether prices in the United States rise relative to those abroad. Nevertheless, there are likely to be differential effects across



An add-on VAT could have substantial effects on consumer demand and sales in the near and medium term.

different types of consumed goods and services due to the likelihood that many consumer items would be exempt or would receive other special treatment under a VAT.

D. Technology

The effect on technology firms would depend on their capital and labor intensity and source of finance. Labor-intensive firms would be likely to pay more in tax under a VAT because wages (and other compensation) would no longer be deductible. Capital-intensive firms could benefit from the immediate write-off of new business investment, but these benefits could be offset to some extent for firms that rely on debt finance because they would lose the ability to deduct interest payments.

E. Retailers

An add-on VAT could have substantial effects on consumer demand and sales in the near and medium term. This is because the VAT would likely lead to a one-time increase in prices, and this price increase could dampen consumption as households and businesses shift more of their focus to saving and investment. The drop in consumer spending would be considerably larger for an add-on VAT as deficit-financed government spending would be replaced with VAT-financed government spending. Consumption would likely fall in both the short- and long-runs.

Particular types of consumed goods could be adversely affected depending on the mix of exemptions and special treatment applied to particular goods and services. Differential taxation would result in the prices of some commodities going up relative to the prices of other commodities, which would affect the sales of companies that operate within the affected markets and industries.

F. Residential housing

VAT treatment of new and existing housing could have major price and sales effects. New housing could be included in the VAT base or could be exempted to help address distributional concerns. If included in the tax base, housing would likely be taxed based on the so-called “prepayment method;” that is, new housing and improvements would be included in the tax base, and consumers would pay tax at the time of purchase. Consumers would, in effect, prepay the tax rather than paying it as they consume housing services over the life of the home.

The fact that housing has traditionally received favorable treatment in the United States increases the likelihood that it would receive similar status under a VAT. If new housing and improvements were taxed, housing would at least partially lose its relative advantage under the current tax system, which could adversely affect housing prices. This is an issue that some reform proposals have recognized. For example, the 2005 President’s Advisory Panel for Federal Tax Reform recommended transition relief for housing because the option it considered would have removed some of the relative advantage housing currently enjoys. This could result in large changes in valuation that could be particularly harmful to recent purchasers, who tend to be highly leveraged.

A recent Ernst & Young LLP study conducted for the National Retail Federation estimated that under an add-on VAT that exempted housing from the VAT base, housing consumption rose by 1.8% initially and more than 1% over the longer term.34 Clearly the extent to which housing is exempt or receives transition relief can have large effects on its value and on the demand for housing and housing-related products.



For more than 40 years, a VAT has been included as part of tax reform and deficit-reduction discussions in the United States.

VII. Political issues

A. Political and business arguments for and against a VAT

For more than 40 years, a VAT has been included as part of tax reform and deficit-reduction discussions in the United States. Although many prominent political figures have recently indicated that a VAT should be “on the table” and “part of the discussion,” the fact that most have also generally stopped short of public endorsement indicates a lack of clear political support for a VAT. In 2010, the US Senate voted in a “Sense of the Senate” vote by 85-13 against a VAT, and the changes in the Congress resulting from the 2010 mid-term elections are also likely to have a significant effect on the debate.

Nevertheless, many in the policy community are of the view that a VAT that raises substantial additional revenue may be inevitable for addressing the nation’s long-term fiscal imbalance. A VAT’s ability to raise substantial revenue in an economically efficient manner makes it an attractive contender for addressing the nation’s long-term fiscal imbalance, but the timing of serious consideration and implementation is less clear.

Political opposition to a VAT over the past several decades has come from both conservatives and liberals. Some conservatives have expressed concern that a VAT could provide an additional source of revenue to the government that could easily be ratcheted up over time to expand the overall size of government; that is, it could be a money machine. Some liberals are concerned that a VAT would fall more heavily on low-income families, who traditionally consume a larger share of their income.

Business views are mixed. Many capital-intensive and export-oriented companies support a VAT as a replacement for the corporate income tax because of its immediate expensing of capital investment and border adjustability (exempting exports and taxing imports). The retail industry opposes a VAT based on concerns that the short-term economic dislocations would harm the economy and the retail sector, as consumers reduce consumption of retail items in favor of exempt consumption items and saving. A number of multinational corporations support the idea of a VAT as a means to implement border adjustment, lower the corporate income tax rate and potentially exempt active foreign-source income from the corporate income tax.

State and local governments generally oppose a federal VAT for fear that it would hinder their ability to rely on retail sales taxes. Several VAT countries with subnational governments (e.g., Canada and India) have addressed this concern by attempting to harmonize their federal and subnational taxes.

The political opposition to a VAT suggests that the United States may be more likely to address the budget deficit first with spending reductions and existing taxes. Only when spending reductions and existing taxes are considered inadequate might Congress and the President turn to a federal broad-based consumption tax. It is also possible that other types of broad-based consumption taxes, such as energy taxes or financial transaction taxes or fees, may be considered before a VAT.



A VAT would raise significant transition issues because of the potential effects on the value of existing assets.

B. Add-on VAT and/or replacement VAT

The focus of the recent commissions and task forces — the Fiscal Commission and the Debt Reduction Task Force — was to reduce the deficit and stabilize the federal government’s debt. The Fiscal Commission did not recommend a VAT. In contrast, the Debt Reduction Task Force recommended an add-on VAT of 6.5%.

Most prior proposals for a VAT, however, have viewed it as a means to address perceived problems with the current tax system, that is, to raise a given amount of revenue in a more economically efficient manner, rather than to raise more revenue. For example, Rep. Ryan’s (R-WI) Road Map would replace the corporate income tax with a VAT. This is the same approach considered by the Department of the Treasury’s 2007 study to improve the competitiveness of the US business tax system. Other proposals have included VATs to replace major portions of the income tax or to finance spending programs (e.g., health care).

The effects of a VAT would be dramatically different depending on how the revenues were used. Forestalling future increases in interest rates by addressing the long-term fiscal imbalance in the United States or eliminating the worst features of the current US tax system would likely have very different effects on companies, industries and the economy.

C. Distributional concerns

Another concern is that a VAT is generally viewed as being borne disproportionately by low-income and moderate-income households. Discussions of VATs are typically combined with discussions of policies to address their regressivity relative to an income tax. These policies invariably include some mechanism to offset all or a portion of the VAT paid by low-income and moderate-income households. In some of the VAT and related proposals, the mechanism has taken the form of a rebate that refunds to households the VAT paid by lower-income taxpayers. In practice, however, the regressivity of VATs (and state sales taxes) invariably has been addressed by narrowing the VAT base through a series of exemptions and special rates applied to consumer goods viewed as necessities for lower-income households. Of course, larger redistributive policies also require a higher VAT rate to raise a given amount of revenue.

D. Transition issues

A VAT would raise significant transition issues because of the potential effects on the value of existing assets. An add-on VAT, for example, would reduce the value of existing assets by the same fraction as the increase in prices from the Federal Reserve accommodation of a VAT. For example, a 10% comprehensive VAT would make existing assets worth 10% less in after-tax terms. This occurs because the consumption eventually financed by the assets ultimately would be taxed at 10%.

Some view this one-time tax as desirable and as a way to address the so-called “entitlement problem,” which has been characterized as a large transfer of wealth to the baby boomers from future generations. The one-time tax or levy on existing assets, however, is viewed as falling primarily on the baby boomers as they currently hold a substantial fraction of existing assets. So, a one-time tax through a VAT could be viewed as an indirect way to reduce the baby boomers’ entitlement benefits. From this perspective, the one-time tax represents an intergenerational transfer from generations alive when the tax is adopted, especially the elderly, to future generations.



In addition, to the extent this one-time tax is unexpected and reduces the value of existing assets, most economists assert that it has no effect on economic decision-making. However, to the extent a one-time tax is expected to be repeated (if, for example, the tax is introduced at 5% but is anticipated to rise to 10% and then 15% over time), the tax could affect household and business behavior, as taxpayers modify their spending patterns in response to the expected rate increase. Subsequent increases in the VAT rate would cause corresponding reductions in asset values.

E. State and local government concerns

A VAT that replaces individual and/or corporate income taxes could have a substantial effect on the ability of state and local governments to administer their existing income taxes. Currently, many state income tax systems conform to the federal income tax in important ways. Administration and enforcement is also often coordinated between the federal and state governments. Elimination of the individual and/or corporate income tax would likely reduce conformity between state income tax systems and make both administration and enforcement more difficult.

State and local governments also would be faced with the prospect of conforming their consumption tax base, whether a retail sales tax or a new VAT, to the federal VAT base. Deviations from the federal base would increase firms’ compliance costs. Nevertheless, other countries, such as Canada and India, do operate national and subnational consumption taxes side by side and have been able to develop working relationships between the national and subnational tax structures.

F. Small business concerns

A VAT may impose substantial compliance burdens, especially for small businesses. This has led many countries and many proposals for a VAT in the United States to exclude small businesses, typically companies with business receipts below a certain size, from the VAT. If the small business is a supplier to a larger business subject to VAT in the production chain, the exemption actually has little effect on the aggregate level of VAT paid. The exemption simply moves the remittance of the VAT to the government up the production chain. VAT exemptions, however, increase complexity when viewed from the perspective of a multinational enterprise operating in a global setting. As indicated in Figure 4, the exemptions vary considerably from country to country, thereby requiring multinational enterprises to navigate different countries’ rules.



Being a proactive participant in the policy process at an early stage is necessary to help policymakers understand the potential effects of legislative proposals on business decisions.

VIII. What to watch for

A. Commissions and task forces issuing recommendations

Several commissions and task forces have released recommendations on how to address our nation’s long-term fiscal imbalance.35 This represents the beginning of what will likely be a multiyear effort to address the deficit and growing government debt. The commissions and task forces are considering a variety of ways to reduce spending and raise additional revenue, not only with a VAT but also by broadening the existing income tax base by repealing or scaling back some existing tax expenditures.

It is important for companies to recognize that while the recommendations and policy options put forward by the commissions and task forces could be used to reduce the deficit, they might also be used to fund other spending and tax policy objectives.

B. Increasing pressure for deficit reduction

The deficit was nearly 9% of GDP in fiscal 2010 and is forecast to exceed 4% of GDP in each of the next 10 years. Persistently large deficits are likely to lead to continued calls for some combination of spending reductions and higher taxes and could lead to consideration of a VAT.

Income and payroll taxes have been the primary focus for raising additional revenue. The Medicare tax, for example, was increased by 0.9% as part of the health care reform legislation enacted last year, and this tax will be extended to unearned income (both changes scheduled to take effect in 2013). The extension of the 2001 and 2003 tax cuts through the end of 2012 creates more uncertainty and could serve as a catalyst for broader reform of the income tax and, potentially, congressional consideration of a VAT.

Both the President’s Fiscal Commission and the Debt Reduction Task Force put forward reform plans that would raise additional revenue by limiting or eliminating many individual and business tax expenditures.36 The Debt Reduction Task Force proposal also included a 6.5% add-on VAT. Companies need to follow this debate and should be prepared for continued focus on revenue-raising alternatives.

C. New legislative proposals with significant details of a VAT spelled out

As concerns over the deficit grow and a substantial portion of the tax code remains in flux, it is likely new tax reform proposals will be put forward. Serious discussion of a VAT will necessarily include details on transition relief, the tax treatment of particular sectors such as financial services and health care, and how to address imports and exports. These details can have substantial effects on companies, industries and markets. Being a proactive participant in the policy process at an early stage is necessary to help policymakers understand the potential effects of legislative proposals on business decisions.



D. Other countries increasing their VAT revenues

It is important for companies to recognize that the VAT issue extends well beyond the United States. Other countries continue to adjust their revenue systems in response to their own growing deficits and debt levels. The United Kingdom increased its VAT rate from 17.5% to 20% in January 2011, while Japan considered, but did not adopt, an increase in its VAT rate from 5% to 10% in 2010. The nearly 150 countries with VATs continue to make adjustments to their fiscal systems as they compete for investment and adapt to changing economic circumstances.

Companies need to keep abreast of changes in other countries’ VAT systems and understand how changes in VATs abroad — whether related to design, administration or enforcement — affect their own tax situation, as well as their industries and markets.37



A VAT would raise many issues for companies and their industries. It is critical for companies to be proactive in understanding how a VAT or related tax reform proposals could affect their industries and markets.

IX. How to stay informed

A. Monitor policy discussions

The tax reform debate has already begun. Congressional hearings are already being held on tax reform and are scheduled throughout much of 2011. VATs and other consumption-type taxes are receiving attention at some of the hearings. Moreover, VATs are major components of some reform proposals, such as the Debt Reduction Task Force proposal (November 2010) and Rep. Ryan’s Road Map (January 2010). The policy options and issues being raised in hearings and reform proposals may indicate the direction Congress will take as the debate on how to address the nation’s long-term fiscal imbalance and reform the tax system intensifies.

Companies need to follow and engage in this debate as new tax reform and deficit reduction proposals emerge. There could also be renewed interest in consumption-type taxes that fall short of a full-blown VAT, such as a gasoline tax, carbon tax, cap and trade program, bank tax/fee, or other fee-based proposal.

Companies should also monitor the deliberations concerning the possible extension of the 2001 and 2003 tax cuts, which are set to lapse again at the end of 2012. The pending expiration of these tax cuts may serve as a trigger for Congress to reform the tax system.

B. Understand the issues generally and VAT issues specific to your industry

A VAT would raise many issues for companies and their industries. It is critical for companies to be proactive in understanding how a VAT or related tax reform proposals could affect their industries and markets. Whether particular goods and services are included or excluded from a VAT base, for example, can have substantial effects on an industry’s or company’s markets. Similarly, changes to the income tax made in concert with a VAT can also have large effects on a company, industry or market.

Some industry groups have already begun to analyze and understand VAT effects and focus on important design issues that may help reduce the potential negative impacts. Companies need to work on their own or through their trade associations not only to understand and follow the debate but also to follow what their peers are doing. Companies and industries that get involved in the policy and legislative process at an early stage can expect to have the greatest influence on key features of a proposal’s design.

C. Understand how the proposals might affect your company, customers and suppliers

A VAT would have different effects on a company depending on that company’s characteristics (i.e., source of finance, capital or labor intensity, exports versus imports). Understanding how a proposal might affect your company is the first step in understanding the mechanics of different VATs and their potential effects on your tax situation. Modeling the impact of a VAT, either as an add-on or a replacement, will help identify the key issues important to your company and help you participate in the policy and legislative process.



X. Conclusion

The current focus on options to reduce the deficit and reform the tax system has the potential to raise the level of discourse over the possibility of a VAT in the United States. Businesses need to pay close attention to these developments and be prepared to participate in the discussion. Taking the time now to understand how VATs work in other countries and how they have evolved over time will help businesses determine how a VAT might affect them and, ultimately, whether and how they would respond to such a tax. Understanding different VAT approaches will help businesses be more effective participants in any upcoming legislative and policy discussions.

Ultimately, whether the United States adopts a VAT is a decision Congress and the President will make, but they will do so based upon input from constituents. Informed businesses can play a key role in shaping that debate. Moreover, regardless of the outcome, US companies operating outside the United States must comply with other countries’ VAT systems. These businesses can benefit by understanding and participating in policy discussions about reducing the multiple burdens and tax risks from VAT systems in other countries.

1A recent World Bank study found that compliance costs for VATs were 26% higher than for corporate income tax. World Bank, Paying Taxes 2010, November 2009, Appendix 1.3.

2 For recent trends, see “Indirect Tax in 2011: A review of global indirect tax developments and issues,” Ernst & Young LLP, 2011.

3 One task force, the President’s National Commission on Fiscal Responsibility and Reform, issued its final report on 1 December 2010. The Bipartisan Policy Center’s Debt Reduction Task Force released its report on 17 November 2010, outlining proposals for debt reduction. Finally, the Peterson-Pew Commission on Budget Reform released recommendations on 10 November 2010, on budget process issues.

4 Internal Revenue Service, “National Taxpayer Advocate’s 2010 Annual Report to Congress,” 31 December 2010, p. 4.

5 President’s Advisory Panel on Federal Tax Reform, “Simple, fair and pro-growth: proposals to fix America’s tax system,” November 2005, pp. 35-36.

6 IRS, supra note 4, p. 3.

7 Asa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia, “Tax and economic growth,” Economics Department Working Paper No. 620. ECO/WKP(2008)28, Organisation for Economic Cooperation and Development, 11 July 2008.

8 Gary S. Becker and Casey B. Mulligan, “Deadweight costs and the size of government,” Journal of Law and Economics, 46(2), October 2003, pp. 293–340.

9 Michael Keen and Ben Lockwood, “Is the VAT a money machine?” National Tax Journal, 54(4), December 2006, pp. 905–928.

10 Several countries have subtraction-method VATs at the regional level, in addition to their federal credit-method VATs. See Tom Neubig, Robert Cline and Estelle Dauchy, “Non-VAT taxes on value added: the European Union experience,” Ernst & Young LLP Tax Insights, June 2010.

11 Under a VAT, the real purchasing power of consumers would need to fall by the amount of the tax. It is through this reduction in purchasing power that consumers bear the burden of the tax. The reduction in purchasing power



could occur either though a rise in nominal prices or a fall in nominal wages. Generally, it is thought that the Federal Reserve Board would seek to enable the reduction in purchasing power by engineering a one-time increase in the price level. The alternative would be for the Federal Reserve Board to do nothing, which would then, according to economic theory, result in a one-time decline in nominal wages. Such a decline could only occur over some period of time and would likely cause substantial dislocations throughout the economy. Avoiding these dislocations is the major reason the Federal Reserve Board is expected to “accommodate” the VAT through a one-time increase in prices.

12 For example, a 10% VAT that only fell on 50% of consumption would, in general, only result in a 5% increase in prices.

13 Robert Carroll, Robert Cline, Tom Neubig, John Diamond and George Zodrow, “The macroeconomic effects of an add-on Value-Added Tax,” Report prepared by Ernst & Young LLP on behalf of the National Retail Federation, October 2010, p.21.

14 Initially, its elimination was the subject of public referendum, but the Michigan State Legislature preemptively repealed the SBT.

15 For example, see Robert Cline and Tom Neubig, “Five federal lessons from California’s near-VAT experience,” Ernst & Young LLP Tax Insights, April 2010.

16 For a discussion of Japan’s VAT, see Alan Schenk, “Japanese consumption tax after six years: a unique VAT matures,” Tax Notes International 11(21), 1995, pp. 1379–1393.

17 Note that the VAT is referred to as a GST in Australia, Canada and New Zealand.

18 A recent EU publication, “VAT Rates Applied to the Member States of the European Union” (DG TAXUD, May 2010), lists 20 major categories of goods and services that are zero rated in the UK, including food, medicines, health care and sales to charitable organizations.

19 Two notable examples are President Nixon’s 1970 Task Force on Business Taxation and President Bush’s 2005 Advisory Panel on Federal Tax Reform.

20 Organisation for Economic Co-operation and Development, Consumption tax trends, 2008, 2008, p. 53.

21 Ibid.

22 World Bank, supra note 1.

23 Reckon LLP, “Study to quantify and analyze the VAT gap in the EU-25 member states,” report prepared on behalf of the EU Directorate-General for Taxation and Customs Union, 21 September 2009, p. 22.

24 Congressional Budget Office, “Effects of adopting a Value-Added Tax,” February 1992, pp. 70–72.

25 Washington State Department of Revenue, “Retailers’ cost of collecting and remitting sales tax,” 1998.

26 “Preparing for the GST: an Australian survey,” Ernst & Young LLP, 1999, p. 6.

27 Richard Summersgill, HM Revenue & Customs, “Improving VAT compliance in the United Kingdom,” Presentation to the OECD Forum on Tax Administration (September 2006).

28 For a more detailed discussion of these issues see “VAT and GST: Managing the multinational burden,” Ernst & Young LLP, 2011 and “VAT and GST: Multiple burdens for multinational companies,” Ernst & Young LLP, 2010.

29 Bradford, David F., “The taxation of financial services,” Economic effects of fundamental tax reform, ed. Henry



J. Aaron and William G. Gale (Washington, DC: Brookings Institution, 1996), pp. 437–464.

30 See International Monetary Fund, “A fair and substantial contribution by the financial sector,” Final Report for the G-20, June 2010.

31 The term “flow-through businesses” is used here to include S corporations, partnerships, limited liability companies and sole proprietorships. While sole proprietorships are not flow-through entities per se, their income and deductions are reported on Form 1040, Schedule C, and they are subject to the individual income tax on such income.

32 Robert Carroll and Gerald Prante, “The Flow-Through Business Sector and Tax Reform,” report prepared by Ernst & Young LLP on behalf of the S Corporation Association, April 2011.

33 See, for example, Organisation for Economic Cooperation and Development, Center for Tax Policy Administration, “Survey on the taxation of small and medium-sized enterprises: draft report on responses to the questionnaire,” revised 5 July 2007, Tables 1–3.

34 Under the VAT proposals analyzed, the demand for housing increased because it was excluded from the VAT base and, thus, untaxed; Carroll et al., supra note 13.

35 Debt Reduction Task Force, supra note 3.

36 The August 2010 report of the President’s Economic Recovery Advisory Board also laid out dozens of options to raise additional revenue by limiting or eliminating various individual and corporate tax expenditures.

37 “EY Indirect tax briefing: A review of global indirect tax developments and issues,” Ernst & Young LLP, April 2011.

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