It seems like VAT pops up a couple of times in every election cycle. This time it is Ted Cruz, one of the Republican presidential hopefuls, who proposes a “Business Flat Tax”.
Cruz says that:
“all companies will pay a simple, low rate Business Flat Tax of 16 percent. The tax will be based on revenues minus expenses such as equipment, computers, and other business investments.”
The Tax Foundation has reviewed the impact of the entire plan (BFT is just an element of a bigger plan) and says of the BFT:
“Enacts a broad-based, 16 percent “Business Transfer Tax” or value-added tax. This tax is levied on all business profits, less capital investment. This would include the payroll of business, government, and non-profit institutions, as well as net imports. The tax would exempt from taxation the purchase of health insurance.
A business transfer tax is also often known as a subtraction-method value-added tax. While its base is identical in economic terms to that of the credit-invoice VAT seen in many OECD countries, it is calculated from corporate accounts, not on individual transactions.”
The Tax Foundation’s entire analysis is here: http://taxfoundation.org/article/details-and-analysis-senator-ted-cruz-s-tax-plan.
So, like in sales tax, under BFT we don’t have to deal with the burden of mandatory invoicing – no input tax calculation on purchase invoices and not output tax on sales invoices, but rather Accounts Receivable minus Accounts Payable is the gross tax base, from which some adjustments can be made (the capital investments that may not appear on Accounts Payable, depending on the accounting rules).
Also, we don’t have to worry about tax rules of goods vs. services, inter-state zero-rating, reverse charges, imports and exports, because all these sales and purchases would be included in the company’s accounts, and thus included in BFT’s tax base. The trouble is that exports would be standard rated, but surely these supplies can be simply excluded from the tax base.
However, my main critique is that I can’t see any VAT-like indirect tax without invoices. Sure, not every VAT is as invoice-focused as the European type (think the consumption tax in Japan), but in reality even the auditors of Mr. Cruz’ plan would like to see more support for the input tax credit than simply putting a purchase in the AP account. Or ensuring that every sale is booked in AR. There are plenty of excellent examples in Brazil, China, Taiwan and elsewhere, where invoicing is a key driver for taxability, yet the admin burden can be simplified with online clearing.
The somewhat-optional “fiscal voucher” system that Puerto Rico proposes for the April 1, 2016 introduction of VAT will probably have to get more serious if Puerto Rico wants to improve on anti-fraud auditing and reporting.
The New York Times has a recent article on Cruz’ tax plans – not easy on the eyes because of the staccato writing style of the author: http://nyti.ms/1Ow5jDx
Cruz has always been the enfant terrible of the Republican mainstay and it would be hard to imagine conservatives agreeing on a tax plan like this. But hey, Cruz is a key player at this point of the elections (December 2015) and he even has a good chance of becoming the Republican presidential nominee.
Let’s see what happens – I will keep you updated.