Unprecedented, amazing times here in the U.S., where the election circus gets crazier by the day. One of the Republican presidential candidates, Ted Cruz, who currently runs as a solid second, has proposed to replace most taxes with a “Flat Business Tax”. And due to Mr. Cruz’ increased profile, the Flat Business Tax gets a fair share of media coverage.
I looked forward to hearing from the Tax Policy Center, which is a think-tank of tax experts and not immediately connected to any of the political parties. Len Burman is one of their experts, and Len wrote a brief article about the Flat Business Tax and calls it a subtraction method VAT. It’s a quick read – have a look at it here: http://taxvox.taxpolicycenter.org/2016/01/15/ted-cruzs-business-flat-tax-is-a-vat/. He writes:
“Cruz’s VAT is different from the European version in the way it’s administered and in scope.
Most countries use a credit-invoice VAT where firms are responsible for tax on the entire sale price, but claim a credit for taxes already paid by their suppliers. If all their suppliers remit the VAT, then the credits completely offset the tax owed on purchased inputs. And the ultimate tax liability is the same as under the subtraction-method. The credit method is considered an improvement since it is self-enforcing: Purchasers will demand tax invoices from their suppliers so they can claim the credits.”
With this explanation, my point is still that Cruz’ Flat Business Tax is not a VAT as we know it – see my earlier comments here: http://www.us-vat.com/blog/?p=1141 and here http://www.us-vat.com/blog/?p=1127. Some form of the subtraction-method VAT has only been tested in France for a couple of years – I think from 1948 to 1954 – to be ditched swiftly in favor to the VAT that by now the rest of the world has embraced. And the current consumption tax in Japan looks somewhat like a subtraction-method VAT, but only from a distance.
What seems to be underestimated is the economic angle: a subtraction-method VAT is not at all a tax on individuals – subtraction method VAT is a tax on businesses, like Cruz correctly points out. It is just another calculation method to tax business profit.
And credit invoice VAT is not at all a tax on businesses (because only businesses can credit) – it is ultimately a tax on the end purchaser, the individual who does not have a right to credit the invoiced tax.
Therefore, subtraction-method VAT and credit-invoice VAT are profoundly different taxes, with significant differences throughout the supply chain and in the final tax burden.
Interestingly, the U.S. General Accounting Office produced a report in 1989 that discussed various forms of VAT – I linked the pdf below. They basically say that subtraction-VAT is simpler, but credit-invoice VAT is more flexible.
Still, it’s very unlikely that the U.S. will introduce any federal indirect tax under the next few presidents – whether we call it a VAT or not. In the meantime, look out for more critiques on the Cruz tax plans, like here: https://tinyurl.com/z5ddkb5
The most recent analysis of Ted Cruz’ entire tax plan is here:
Download (PDF, 7KB)
The 1989 report of the U.S. General Accounting Office:
Download (PDF, 3.79MB)