Reproduced with permission from Tax PlanningInternational Indirect Taxes, 15 IDTX 4, 1/31/17. Copyright� 2017 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

JANUARY 2017

Flirting with a U.S.VAT? Comparison ofRecent U.S.Proposals from anIndirect TaxPerspectivePhilippe Stephanny and Amie Ahanchian 1

KPMG LLP, U.S.

There is serious discussion of tax reform in the U.S., and theglobal trend for governments to generate revenue fromconsumption taxes has led to a reappraisal of the possibility of avalue added tax.

Like winter, tax reform is coming, or at least se-rious talk of reform. Following the November8 elections, Republicans will control the

White House and Congress, therefore significantly in-creasing the chances for tax reform in near future.2

While most tax writers speak of revenue neutralreform,3 any major tax reform will likely have to takeinto consideration economic growth,4 the ever-expanding government debt issued by the U.S.,5 andinternational competition. 6

Looking beyond the U.S. to our peer countries,7 ascharacterized by their membership in the Organisa-tion for Economic Cooperation and Development(OECD), and even beyond, to the rest of the world, onecan see that the U.S. is not the first country to contem-plate long-term solutions to these challenges. In fact,while income and property taxes are leading sourcesof revenue in the U.S. (federal, state, and local), theglobal trend is for countries to generate revenue fromconsumption taxes on goods and services, specificallyvalue added tax (‘‘VAT’’)—also known as goods and

services tax (‘‘GST’’)—and excise taxes. In fact, con-sumption taxes comprised the most significant sourceof tax revenue for OECD countries in 2013, account-ing for approximately 32.7 percent of revenue. In con-trast, the U.S. only generated 17.4 percent of its 2013revenue from these channels.8

The difference in revenue streams appears to havecaught the eye of U.S. lawmakers, as two Republicanpresidential hopefuls included in their tax plan a shifttowards a consumption tax that according to observ-ers had characteristics of a VAT.9 More importantly,on June 24, 2016, House Republicans presented theirtax reform blueprint, ‘‘A Better Way’’10 (‘‘Blueprint’’)that includes a business cash flow tax that is describedas akin to a VAT. This proposal appears also in linewith H.R. 4377, the American Business Competitive-ness Act of 2015,11 introduced by RepresentativeNunes (R-CA), which would replace the corporateincome tax with a business cash flow tax. On the otherside of the aisle, and on the other side of Capitol Hill,Senator Cardin (D-MD) proposed in 2014, and

Philippe Stepha-nny is a seniormanager in KPMGLLP’s WashingtonNational Tax prac-tice and Amie Ah-anchian is amanaging directorin KPMG LLP’sTrade and CustomsServices practice

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amended in 2016, the Progressive Consumption TaxAct (‘‘PCT’’) that would introduce a federal credit in-voice VAT.12 Rep. Renacci (R-OH) also uses a credit in-voice VAT as part of his ‘‘Simplifying America’s TaxSystem’’ (‘‘SATS’’) plan, released in July 2016.13

It seems extraordinary to have severalconsumption-based tax reform proposals introducedin such a short timeframe, resulting in one authoreven claiming that ‘‘a U.S. VAT may be closer than youthink.’’14 We think it’s exceptional enough to warranta close examination. This article seeks to examine thefour recent proposals, by (1) offering an explanationof each proposal; (2) analyzing the information avail-able to assess the key elements of each proposal; and(3) discussing how the proposals fare in the face of ar-guments against introducing a VAT in the U.S.

I. Tax Reform Proposals and VAT

A. Overview of the Concept of VAT

The VAT regime is one of the most efficient consump-tion tax systems both in terms of revenue for govern-ments and neutrality towards domestic andinternational trade. According to the OECD, 167countries and 33 out of 34 OECD countries haveimplemented some form of VAT in the last 50 years.15

The interest in VAT worldwide as a form of taxationis tripartite. First, a VAT, unlike sales taxes levied bystate and local authorities in the U.S., is charged ateach leg of the supply chain on almost all sales ofgoods and services.16 However, to be neutral towardbusiness investment, each business involved in thesupply chain is generally allowed to credit the VAT in-curred on expenditures against VAT collected on sales.As a result, the final consumer bears the ultimateburden of the VAT. This ensures a more robust tax col-lection system and reduces tax evasion.17

Second, a VAT is somewhat a self-enforcing tax be-cause the credit mechanism creates an incentive forbusinesses to act as tax collecting agents on behalf ofthe government.18 Finally, compared to an income taxand retail sales taxes, a VAT creates fewer disincen-tives to investment and fewer economic distortions.19

Leading practices around the world show that a VATworks best when it has the following characteristics:s a single rate;

s applied to goods, services, and imports;

s relieves exports of goods and services;

s only a limited number of exemptions;

s low compliance costs for businesses and govern-ment;

s neutrality among businesses; and

s transparency in respect of its administration.20

B. The Four Current Proposals in the U.S.

The four proposals aim to reduce the corporateincome tax, reduce taxes on capital, increase taxes onconsumption, remove disincentives to investment,and reduce incentives for U.S. companies to retainearnings overseas. Each proposal discussed in this ar-ticle offers a unique plan to change the way U.S. citi-zens and corporations are taxed.

1. House Republican Blueprint

The House Republicans’ Blueprint offers to simplifyand lower income taxes by consolidating the indi-vidual income tax brackets into three, and introduc-ing a maximum individual tax rate of 33 percent.Capital gains and dividends would be taxed as ordi-nary income with a 50 percent exclusion of capitalgains, dividends, and interest income. In addition, theBlueprint would almost double the standard deduc-tions available while repealing most itemized deduc-tions except for mortgage interest and charitablecontributions. The Blueprint would also modestly in-crease the Child Tax Credit.

On the corporate tax level, the Blueprint proposesto replace the current corporate income tax with a 20percent destination-based cash flow tax, which theBlueprint compares to a VAT. For this purpose, theBlueprint would provide businesses with the benefitof fully and immediately writing off (or ‘‘expensing’’)the cost of investments in tangible and intangibleproperty, thus repealing current depreciation rules.However, the Blueprint would eliminate the deduct-ibility of net interest expenses on future loans andlimit the deduction for net operating losses. The Blue-print would move from a worldwide tax system to adestination-based tax system by (1) providing forborder adjustments exempting exports and taxing im-ports, not through the addition of a new tax but withinthe context of the revamped business tax system, and(2) introducing a 100 percent exemption for dividendsfrom foreign subsidiaries.

2. Nunes Proposal

The Nunes proposal addresses only business taxation.Similar to the House Blueprint, Rep. Nunes would re-place the corporate income tax with a 25 percentterritorial-based cash flow tax. Rep. Nunes would alsoallow the expensing of capital assets and eliminatemany business tax deductions and credits. BecauseRepresentative Nunes introduced his tax reform pro-posal in the form of a bill, it provides greater detailthan the Blueprint. As both proposals discuss a cashflow tax, the authors assume that the Blueprint wouldwork in a similar way to the Nunes bill, unless theBlueprint specifically departs from it.

3. Cardin Bill

Sen. Cardin’s bill encompasses both individual andbusiness income tax reform. Sen. Cardin proposes tointroduce family allowances that would result ineliminating income tax liabilities for most house-holds.21 For the remainder, Cardin proposes to reducethe individual income tax brackets to three, with amaximum tax rate of 28 percent. Under the plan, long-term capital gains and qualified dividends would betreated as ordinary income and several itemized de-ductions would be retained. Moreover, Sen. Cardinproposes to cut the corporate income tax rate to 17percent, but would otherwise keep the current corpo-rate net income tax unchanged. Sen. Cardin would re-place the loss in tax revenue with a 10 percentprogressive consumption tax (‘‘PCT’’), which wouldapply to all sales of goods and services and allow busi-nesses involved in a supply chain to credit the PCT in-

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curred on expenditures against PCT collected onsales. According to information accompanying theproposal, the PCT is progressive because of the newincome tax allowances and the introduction of PCTrebates paid to eligible recipients.22

4. Renacci Proposal

Most similar to Sen. Cardin’s bill is Rep. Jim Renacci’sproposal, which outlines a plan to implement a sevenpercent VAT, which he calls a ‘‘business activity tax’’,modeled much like Sen. Cardin’s PCT. However, Rep.Renacci proposes to use the VAT to completely elimi-nate the current corporate income tax. He plans toimpose a one-time tax on accumulated foreign assets,

whether repatriated or not, with the revenue dedi-cated to the Highway Trust Fund. Rep. Renacci wouldreduce the individual income tax brackets to three,with a maximum tax rate of 35 percent, and wouldtreat capital gains and dividends as ordinary income.Moreover, Rep. Renacci proposes to increase the stan-dard deduction by almost threefold, but limit item-ized deductions to mortgage interest and charitablecontributions. He would also increase the EarnedIncome Credit. As Rep. Renacci’s plan refers to Sen.Cardin’s VAT proposal, the authors assume for thepurpose of this article that Rep. Renacci’s VAT wouldwork similarly to the Cardin bill, unless Renacci’s taxreform plan departs from it.

Cardin Renacci Blueprint Nunes

Individual income taxreform

Three brackets withmaximum rate of28 percent

Capital gains anddividends aretreated as ordinaryincome

Family allowancesand rebates

Three brackets withmaximum rate of35 percent

Capital gains anddividends aretreated as ordinaryincome

Increase standarddeduction andEarned Income TaxCredit

Three brackets withmaximum rate of33 percent

Capital gains anddividends aretreated as ordinaryincome with 50 per-cent exclusion

Increase standarddeduction andChild Tax Credit

N/A

Corporate tax reform Reduce corporateincome tax rate to17 percent

Eliminate corpo-rate income tax

Reduce corporateincome tax rate to20 percent

Replace deprecia-tion with direct ex-pensing

Replace worldwidetax system withdestination-basedtax system

Introduce borderadjustment provi-sions

Reduce corporateincome tax rate to25 percent

Replace deprecia-tion with direct ex-pensing

Replace worldwidetax system with ter-ritorial tax system

Eliminate manybusiness tax creditsand deductions

New consumption tax 10 percentdestination-basedconsumption tax

Seven percentdestination-basedconsumption tax

N/A N/A

II. Comparison of Key VAT Characteristics

Conceptually, VATs can be categorized based on:

s the computation method;

s the tax base; and

s the nature of cross-border adjustment.23

A. Computation Method

There are three alternatives in VAT computation:

s the addition method;

s the subtraction method; and

s the credit-invoice method.24

Each method is designed to identify the ‘‘valueadded’’ at each stage of production, which can be sum-marized as the amount added by the taxpaying entity

to the value of goods and services it purchased fromothers by the application of its labor and capitalequipment.25

s Under the addition method, the tax liability is equalto the tax rate multiplied by the value added by thetaxpayer, which is defined as the sum of a compa-ny’s economic factors of production (i.e., wages,rent and interest expenses, and profit).26 Anaddition-method VAT will likely be an income-based tax rather than a consumption-based tax ifthe profit for VAT purposes is computed based ondata collected for income tax purposes because thetax would be imposed on the potential power toconsume rather than the effective exercise of con-suming goods and services.27 Since the tax is notbased on the sales price of goods and services it isunlikely that the complete tax is shifted forward to

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the consumer.28 Some may fall back on the laborand capital employed by the taxpayer. No country todate has implemented an addition-method VAT,even though the Michigan Single Business Tax (re-pealed on business activity after December 31,2007) was a modified version of an addition-method VAT.29

s Under a subtraction-method VAT (also known as a‘‘business transfer tax’’), the tax liability is equal tothe tax rate multiplied by the difference betweenthe value of sales by the taxpayer and non-laborinputs (i.e., goods and services purchased fromother firms).30 A subtraction-method VAT is de-scribed as an ‘‘accounts-based’’ VAT (meaning, asopposed to being computed on a transaction-by-transaction basis). As a result, it is commonly per-ceived to be a tax on an entity.31 The Nunesproposal has characteristics of a subtraction VAT inthat it allows deductions for purchases from otherfirms.32 It does, however, allow a deduction of laborcosts. The Republican Blueprint describes the cashflow tax as VAT–like, but is silent on whether laborcosts are deducted in computing the tax base.33 Theauthors however assume that House Republicanswould make wages deductible based on the Nunesdraft bill. As noted by Sullivan, the inclusion of adeduction for wages is the key difference between aconsumption-based tax and an income-based tax.34

s Under the credit-invoice VAT, the tax liability is as-sessed and collected separately on outputs andinputs, but a taxpayer only remits the difference be-tween VAT collected on sales invoices and VAT paidon purchase invoices.35 Most countries with a VATsystem have adopted a credit-invoice VAT.36 Thesuccess of the credit-invoice method VAT is due tothe fact that it handles multiple rates more effi-ciently than a subtraction-method VAT.37 In addi-tion, because taxpayers are required to retaininvoices for claiming VAT credits it is often consid-ered as having a self-enforcing characteristic.38 Fi-nally, (as explained in Section C, below) borderadjustment is more easily obtained under a credit-invoice VAT than under a subtraction-methodVAT.39 All these arguments seem to have played arole for Sen. Cardin and Rep. Renacci to proposethe introduction of a credit-invoice VAT.40 Rep.Renacci explains his efforts to adopt a credit-invoice VAT because of its ‘‘transparent, self-enforcing nature.’’41

B. Tax Base

When analyzing the tax base, authors specialized inVAT consider whether a VAT should only tax personalconsumption, net national product, or even gross do-mestic product.42 In doing so, the key question iswhether capital goods should be included in the taxbase.43

There are three types of VAT base:s the product type VAT;

s the income type VAT; and

s the consumption type VAT.44

Under the product type VAT, capital goods pur-chased by a taxpayer are not deductible from the taxbase nor are taxpayers allowed to deduct a deprecia-

tion for capital goods.45 The tax base thus corre-sponds to consumption and gross investment.

Under the income tax type VAT, capital goods pur-chased by a taxpayer are not deductible from the taxbase in the year of purchase. However, taxpayers areallowed to deduct depreciation of capital goods.46 Thetax base is therefore consumption and net investment.

Under the consumption type VAT, all capital goodspurchased during a taxable period may be deductedfrom the tax base, thus relieving investment from thetax burden.47 The tax base is therefore only the con-sumption. Most countries apply a consumption typeVAT, but introduce special rules regarding the deduc-tion available on capital assets either by limiting thededuction (e.g., to the extent of output tax charged) orby requiring to adjust the initial deduction if the use ofthe asset (i.e., taxable versus exempt) changes overtime.48

All four proposals take a consumption type ap-proach, making the immediate expensing of businessinvestments one of the highlights of their tax reformproposal. For instance, the Blueprint states that ex-pensing the cost of investments, rather than applyinga depreciation, ‘‘represents a 0 percent marginal effec-tive tax rate on new investment’’ and further refer-ences expensing as a centerpiece of the Nunes bill todrive growth.49 The PCT similarly does not distin-guish between investment expenditures and generalexpenses, as any tax incurred used in the course of ataxable activity would be creditable in the taxableperiod in which the tax was incurred.50

However, when designing a VAT, countries oftenface the challenge of ensuring that businesses accu-rately account VAT credits on the acquisition of capi-tal equipment used in exempt or mixed activities (i.e.,taxable and exempt), or in non-business activities.51

This has led some countries to impose adjustmentrules that require taxpayers to correct the amount ofVAT originally deducted on capital assets if the use ofthe asset varies within a certain timeframe (i.e., frombusiness use to private use or from taxable activity toexempt activity).52

C. Border Adjustment

Under a VAT, cross-border transactions may either betaxed on an origin basis or on a destination basis.53

1. The Origin Principle

Under the origin principle, VAT is imposed at thepoint of production; exports are subject to tax and im-ports are not.54 The VAT thus becomes a tax on do-mestic production of goods and services.55

Proponents of the origin principle argue that becauseexports are treated just as another stage in the supplychain, an origin-based VAT eliminates borders.56

However, an origin-based VAT can be susceptible totax avoidance and transfer pricing abuse, and coulddistort the location of production.57

2. The Destination Principle

Under the destination principle, VAT is imposed at thepoint of consumption.58 This requires a border adjust-ment to ensure that only domestic consumption istaxed and that all domestic consumption bears the

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same tax burden. On the export side, border adjust-ment is achieved by imposing a zero percent tax on allexported goods. In practice, the exporter does not col-lect any tax, but because he is considered to be per-forming a taxable transaction (at a zero rate) he canrecover VAT incurred on expenditures. The mecha-nism thus relieves the entire domestic supply chain re-lated to the exported goods from the tax.59 Inaddition, under the destination principle, VAT is im-posed on imported goods (generally at the time theyenter the jurisdiction). Businesses using importedgoods and services to perform taxable transactionsare allowed to credit the import VAT paid against anyVAT collected on their domestic sales.60

The destination principle therefore taxes exclu-sively domestic consumption while ensuring that do-mestic and foreign products carry the same VATburden. Most economists agree that, in theory, borderadjustability does not ultimately impact trade.61 Thedisadvantages of the origin principle, and the neutral-ity provided under the destination principle, havecaused the latter to become widely accepted as thebasis for applying VAT to international trade.62

The effect of consumption tax proposals such asthose under review is to reduce tax on capital and shiftthe burden to consumption; all four proposals underreview adopt some form of destination-based taxa-tion. The Cardin—and presumably the Renacci—proposal would introduce a pure destination-basedVAT by applying a zero percent tax on exports and im-posing tax on imports. In addition, VAT incurred onimports would be deductible if incurred in relation totaxable sales in the same way as VAT incurred on do-mestic purchases.63

The Nunes proposal calls for the adoption of terri-torial tax rules by excluding from tax income derivedfrom trade or business outside the U.S.64 BecauseRep. Nunes does not argue that his tax is akin to a VAT,he does not include any border adjustment provisions.While the Blueprint also calls for the end of the world-wide business taxation model, it goes one step furtherby proposing a cash-flow based tax that will be appliedon a destination basis.65 For this purpose, the Blue-print suggests that products, services and intangiblesexported outside the U.S. will not be subject to U.S.tax regardless of where they are produced.66 However,products, services and intangibles that are importedinto the U.S. would be subject to U.S. tax regardless ofwhere they are produced.67 The Blueprint states thatthis border adjustment would be compliant with therules of the World Trade Organization (‘‘WTO’’).68

3. WTO Rules

The WTO rules in question can be summarized as fol-lows:s border adjustments applied to direct taxes are pro-

hibited, but allowed for indirect taxes;s imported goods cannot be treated less favorably

than domestic products; ands border adjustment for indirect taxes cannot exceed

the tax levied on similar products sold in the domes-tic market.69

A pure destination-based credit invoice VAT is thusWTO compliant.70 Despite the perceptions of some,71

border adjustability under a VAT does not impact the

cost of imported goods compared to products manu-factured in the country of importation and does notreduce the price of exported goods compared to prod-ucts made in a foreign jurisdiction.72 With respect tothe Blueprint, due to the lack of details it remainsopen whether a destination-based cash flow tax, as en-visioned by the House Republicans, would qualify asan indirect tax under the WTO rules and whether theborder adjustability would be in line with WTOrules.73

D. Scope

As mentioned in Part I above, the leading practice is tohave a broad-based, single-rate VAT with few exemp-tions. While certain countries such as Brazil or CostaRica have VAT-like taxes that apply only to sales ofgoods or sales of services, most jurisdictions levy VATon all sales of goods and services with few excep-tions.74 The Renacci and Cardin proposals would gen-erally tax all sales of goods and services.

1. Reduced Rates

Countries often use reduced VAT rates as a socialpolicy measure to alleviate the tax burden on low-income households.75 The distributional effect ofthese reduced rates has been largely contested byeconomists preferring other solutions to mitigate re-gressivity.76 In this respect, the proposals follow therecommended one-rate practice, as neither Cardinnor Renacci proposes to apply a reduced rate to par-ticular items.

2. Exemptions

Where a sale of a good or service is exempt from VAT,no VAT is charged on the sale or provision of that goodor service.77 However, the person making that sale isunable to recover the VAT it has incurred on its pur-chases related to the making of that exempt supply.78

Exemptions are usually implemented for social rea-sons (e.g., healthcare and education) or because cer-tain services are difficult to tax (e.g., financialservices). Ebrill et al79 state ‘‘Exemptions are abhor-rent to both the logic and the function of a VAT’’ asthey narrow the tax base, result in taxation of businessinputs, distort business decisions, and result in thepyramiding of the consumption tax. Therefore, theleading practice would be to limit exemptions to thesale of financial services and residential properties.80

Any exemptions that are adopted should be care-fully considered from a policy perspective and theirintended outcome. The Nunes proposal, and thus theBlueprint, do not include any specific exemptions,likely because these proposals take the approach thatthe new cash flow tax is an income-based tax imposedat the entity level.

The Cardin, and probably the Renacci, proposals in-clude exemptions for the rental or leasing of residen-tial property; the sale of qualified residential realproperty; and any supply of financial services. Sen.Cardin would also not impose tax on sales by publicbodies, except for items sold commercially, and non-profits, except for items for which a fee is charged;purchases by these entities would however be subjectto tax. In the latest iteration of his proposal, Sen.

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Cardin has clarified the definitions of financial ser-vices, which he acknowledges is a difficult area onwhich to apply tax.81 On the other side of the Capitol,

Rep. Renacci is seeking feedback on this specific

exemption.82

Cardin Renacci Blueprint Nunes

ComputationMethod

Credit-invoice Credit-invoice Not a VAT (cash flowincome tax); or Sub-traction Method

Not a VAT (cash flowincome tax)

Border Adjustment Destination basedVAT with zero-ratedexports and credit-able tax on imports

Territorial corporatetax

Destination basedVAT with zero-ratedexports and credit-able tax on imports

One-time tax on ac-cumulated foreignearnings held abroad

Destination-basis taxsystem (Tax locationof consumptionrather than locationof production)

Territorial System

Tax Base Direct expensing Direct expensing Direct expensing Direct expensing

Scope Broad-based tax withsingle rate and fewexemptions

Broad-based tax withsingle rate and fewexemptions

Broad-based tax withsingle rate

Broad-based tax withsingle rate

III. Addressing the Arguments against a VAT

Two out of the four proposals under review suggest in-troducing a federal VAT, while the two others have aconsumption tax flavor:83 Sen. Cardin and Rep.Renacci use a credit-invoice method VAT, while theHouse Republicans’ and the Nunes proposals differfrom a VAT by allowing a deduction for wages andsalaries paid. Regardless of the qualities of the variousproposals, commentators have often criticized theconcept of a VAT in the U.S. because VAT has intrinsi-cally been thought to be regressive, hidden, uncontrol-lable as a money machine once implemented, orcostly to administer.84 Any VAT proposal or othermajor tax reform proposal in the U.S. should thus ad-dress these points to a certain extent.

A. Regressivity

One of the general principles of taxation and taxpolicy is that the tax burden should be fairly distrib-uted among the taxpayers. While what constitutes‘‘fair’’ is a subjective judgment, there is a general con-sensus that, in the aggregate, taxes should be distrib-uted progressively with respect to income. Whether atax is considered progressive or regressive depends onthe tax burden of the taxpayer compared to hisincome.85 A tax is considered regressive if the ratio oftax to income is higher at lower income levels than itis at higher income levels. As low income taxpayerstend to consume a larger share of their incomes, a VATthat applies to all goods and services at the same taxrate regardless of the wealth level of the consumer isgenerally considered regressive.

Economists at the OECD have argued that whileVAT systems are regressive when measured as a per-centage of current income, they are generally eitherproportional or slightly progressive when measuredas a percentage of lifetime expenditure.86 Measuringtaxes with respect to current income allows an analy-sis of the immediate distributional effects of con-sumption taxes, whereas an expenditure-based

approach would provide a potentially more reliablemeasure over a lifetime distributional effects of a con-sumption tax.87

While these arguments are important, it is verylikely that in the general public’s eyes a VAT would beconsidered regressive. Gillis and Duncan (14 IDTX 4,6/30/16) addressed this issue with the simple sentence:‘‘they are often regressive, but most of the world hasdecided that it doesn’t matter.’’88 Nonetheless, coun-tries try to alleviate the regressivity in various ways.

Some countries address the regressivity of the VATby introducing reduced rates or exemptions on basicgoods and services in order to alleviate the tax burdenon the poorer households.89 According to proponentsof such measures, the tax is made more progressive byidentifying key expenditures that are the most impor-tant to these households.90

While the OECD found that applying reduced rateson basic goods such as food does have the desired pro-gressive effect, it also found that reduced rates consti-tute poor tools targeting support to low-incomehouseholds as, in the aggregate, upper income house-holds would benefit as much or even more from thesepolicy decisions.91

In a separate study, the New Zealand Revenue au-thorities arrived at the same conclusion with respectto applying a zero rate on food products.92 In otherwords, simply excluding a good or service from taxa-tion may reduce the burden on low-income house-holds, but such a measure is not targeted only to low-income households.

The tax reform proposals under considerationappear to have taken these arguments into account, asthey do not propose applying reduced rates to specificgoods or services, and they limit exemptions to a strictminimum.93

However, as one economist argues: ‘‘What mattersis the progressivity of the entire tax system. Theincome tax and benefits system is the best place to dothat. The GST is not the best place.’’94 One way to im-prove progressivity is thus to use some of the revenuefrom a VAT to create universal transfer payments or toimplement progressive direct tax changes.95 For in-stance, when New Zealand increased the GST rate to

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15 percent in 2010, the country also reduced the topmarginal rate from 38 percent to 33 percent in orderto promote integrity in the entire tax system.96 More-over, when Canada adopted its GST it also introduceda refundable tax credit.97

This seems the approach followed to a certainextent by most of the proposals, (except for the Nunesbill that is focused solely on corporate tax), as theysimplify and reduce the individual income tax, in-crease the standard deduction, or introduce family al-lowances, resulting in many households not beingsubject to income tax. Another way to address regres-sivity would be to use VAT revenues to fund social wel-fare expenditures.98 This seems to be the approachchosen by some European countries when they firstimplemented a VAT.99

B. Hidden Tax

According to the U.S. Government AccountabilityOffice (‘‘GAO’’), a tax is considered visible if it is statedon a receipt or purchase invoice or if it is stated on atax return or pay stub: a tax is considered hidden if itis not so stated.100 Visibility is important to the extentthat it makes the taxpayer aware of the taxes that arebeing paid. A hidden tax would make it easier for agovernment to raise the rates.

One of the biggest misconceptions in the U.S. is thata VAT would be a hidden tax.101 This has perhapssomething to do with the fact that when Americanstravel to Europe and many other VAT countries, retailprices are stated VAT-inclusive, as compared to theU.S. practice where prices are disclosed on shelves taxexclusive, and the sales tax is added on the store re-ceipt. However, such a practice has per se nothing todo with the mechanics of a VAT.102 In the EuropeanUnion (‘‘EU’’) for instance, the requirement to discloseprices tax inclusive is based on consumer protectionlaws rather than the VAT legislation.103 This is be-cause the general public is not expected to know whatthe tax rate is on a particular product, and consumersshould thus know what a product costs when they putit in their basket, rather than during checkout. In ad-dition, receipts from many EU jurisdictions disclosethe VAT amount separately anyway, or the customer isallowed to request a special ‘‘VAT receipt’’ that wouldinclude the VAT amount.

As stated by the GAO, a credit-invoice method VATis visible because the tax amount must appear on eachpurchase invoice.104 This requirement can easily beextended to retail sales even though it does not affectadministration of the tax.105 The Cardin and Renacciproposals can thus not be considered as creating ahidden tax as they require the issuance of an invoiceon which the VAT amount appears. The 2016 versionof the Cardin proposal includes a ‘‘waiver of invoicerequirements in certain cases,’’ including for de mini-mis transactions, which would thus potentially ex-clude retail receipts as a simplification measure.106

Rep. Renacci argues in favor of a full transparency ofthe tax and is seeking feedback on how to reach thisgoal.107

A cash flow tax such as that proposed by House Re-publicans and Rep. Nunes is an accounts-based tax.Sales invoices do not contain an entry for taxes, andthe amount of tax cannot be related to any individual

transaction. The cash flow tax could thus be consid-ered not transparent. Even if the House Republicanproposal were to take the form of a subtraction-method VAT,108 the transparency of the tax would notbe guaranteed, because under a subtraction-methodVAT, tax is included in the price of goods and servicessold, and there is no need to separately state the taxamount for tax administration purposes. As a result, asubtraction-method VAT is more likely to be consid-ered a hidden tax, unless the law requires the tax to bestated separately on sales to consumers.109

C. A Money Machine

For economists, there are two ways to interpret thecommon concern in the U.S. that VAT is a ‘‘money ma-chine:’’s governments with a VAT raise more revenue than

those without; and

s the use of the VAT in itself is a cause of increasedgovernment size.110

Based on OECD statistical evidence, Keen andLockwood conclude that VAT is indeed a ‘‘money ma-chine’’ under both interpretations of the term.111

However, they also found that association between thepresence of the VAT and total tax revenue is notsimple. While a VAT can generate significant revenues,the impact of adopting a VAT on the overall size ofgovernment has been substantially diluted, becausemany governments used a VAT to reduce or eliminateother taxes and not solely to finance additional ser-vices.112 This position is backed by Martin A. Sullivanwho found that only about eight percent of the expan-sion in European taxes between 1965 and 2007 can beattributed to the VAT.113

Despite existent empirical evidence that VAT is nota money machine, the Cardin proposal addresses the‘‘money machine’’ issue directly by requiring that ifthe PCT’s collections exceed 10 percent of GDP, theexcess is to be refunded to income tax filers based onfiling status and number of eligible children.114 UnderRep. Renacci’s proposal, while a VAT would replacethe corporate income tax, he still addresses the gov-ernment growth issue by introducing a circuit breakersimilar to Sen. Cardin’s.115 As a cash flow tax is a formof income tax, for which the money machine aspect isnot questioned, the Nunes proposal and the Blueprintdo not address this point.

D. VAT is Costly to Administer

Measuring the cost to administer any tax should con-sider both the administrative costs and the costs ofcompliance. The administrative costs are those costsdirectly borne by public authorities (e.g., the IRS inthe case of the U.S.), while compliance costs are thoseborne by those businesses and other taxpayers thatare required to collect, remit, and comply with thetax.116

There is no consensus on the administrative cost ofa VAT. For instance, there is considerable variation ofoverall tax administration costs among EUcountries.117In a 1993 report, the GAO found that ad-ministrative cost is largely driven by the complexity ofthe tax (i.e., multiple rates, exemptions, etc.),118 afinding of other authors as well.119In this respect, (as

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mentioned in Part II, above), the proposals underreview appear to propose the adoption of a broad-based, single-rate VAT with few exemptions, thus sup-posedly helping keep administrative costs to aminimum.

However, the GAO report also highlights that theadministrative cost could further be reduced by ex-empting small businesses from VAT.120 The reasoningis that small businesses would only generate relativelysmall amounts of revenue compared to the audit andtaxpayer assistance costs that could be expected.Many countries therefore exempt some small busi-nesses from the tax, but the exemption thresholdsvary greatly.121

Sen. Cardin addresses this issue by introducing a‘‘nonparticipating small suppliers’’ exemption, whichwould exclude from the PCT businesses with aggre-gate taxable PCT revenues of not more thanU.S.$100,000 for the immediately preceding four cal-endar quarters.122 Moreover, Rep. Renacci seeks feed-back on the possibility of introducing a small business

exemption.123 In his proposal, Rep. Renacci arguesthat because of the transparent, self-policing nature ofthe VAT, in conjunction with eliminating the corpo-rate income tax the need for IRS personnel will be re-duced.124

The flipside of administrative costs borne by gov-ernments is the costs of complying with a VAT that areborne by businesses. In regions with a VAT, businessestook more time to comply with consumption taxesthan profit taxes.125 This is further confirmed by Bar-bone and others, according to whom, in jurisdictionswith a VAT compliance, costs are high and significantcompared to revenue collected, and regressive in thatthey are more burdensome to small businesses. Theauthors however highlight that countries that haveadopted e-filing procedures have seen a reduction incompliance costs. Compliance costs will also dependon the complexity of the tax system, and as indicatedin the studies mentioned above, whether small tax-payers are also taken into consideration, which theproposals partly address. (See above discussion).

Cardin Renacci Blueprint

Regressivity Amendments to income tax Amendments to income tax Amendments to income tax

Hidden Tax Requirement to issue in-voices with potential ex-ception for de minimistransactions.

Requirement to issue in-voices, but silent on retailsales

N/A

Money Machine 10 percent GDP cap on VATrevenues, excess is re-funded

Similar system to Cardin N/A

Administration cost Not really addressed, butsmall business excluded

Not really addressed, butsmall business thresholdconsidered

Not really addressed

IV. Conclusion

The U.S. is far from being the only country to recog-nize the challenging road ahead to reform taxation forthe 21st century.126 Lawmakers will likely have to ad-dress common concerns about global competitivenessand high corporate tax rates, and ensure the long-term fiscal position of the U.S.127 It is therefore re-markable that a VAT is considered alongside otherproposals as a way to reform the U.S. tax system.

A U.S. federal VAT would constitute a fundamentalchange and lawmakers would have to carefully con-sider not only the key VAT elements analyzed herein,but also ensure that the entire U.S. tax system followsthe four canons of taxation: equality, certainty, conve-nience and economy.128 In this respect, the proposalsunder review do not take into consideration theimpact their reforms would have on state and localtaxes, especially when considering a federal VAT. Con-sumption taxes have long been considered the pur-view of state and local governments, of which amajority use general sales and use taxes to generatealmost one-third of their revenues.129 Lawmakers, atboth federal and state and local level, would thus haveto address how a federal VAT would interact withthese taxes, by perhaps using the experience of otherfederal countries.130

Finally, the role that public opinion plays in taxreform, especially when adopting a VAT, should not be

disregarded. The U.S. does not have to look far to seehow another jurisdiction took the VAT on a roadtest.In May 2015, Puerto Rico enacted a law that wouldhave introduced a VAT, with the objective of rejuvenat-ing the Puerto Rican economy and filling gaps in thebudget deficit.131 However, before the VAT took effect,under mounting political pressure the Puerto Ricolegislature voted to repeal it.132 Learning from this ex-perience within our own borders, if the U.S. wants tosuccessfully enact a VAT, it will be imperative to edu-cate the public early so that businesses and individu-als alike view the VAT as a positive reform.

Philippe Stephanny is a senior manager in the State and Local Taxgroup of KPMG LLP’s Washington National Tax practice. Amie

Ahanchian is a managing director in KPMG LLP’s Trade and CustomsServices practice.

They may be contacted at: phillipestephanny@kpmg.com;aahanchian@kpmg.com

We, the authors, give a special thanks to Tim Gillis,Global Head of Indirect Tax Services, and HarleyDuncan, Managing Director in KPMG’s WashingtonNational Tax’s State and Local Tax group for theirguidance on our article. We also thank Joseph Cornell,a student at Baylor University and former KPMGintern for his contributions to our research.

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The information contained herein is of a generalnature and based on authorities that are subject tochange. Applicability of the information to specific situ-ations should be determined through consultation withyour tax adviser. This article represents the views of theauthor(s) only, and does not necessarily represent theviews or professional advice of KPMG LLP.

NOTES1 Philippe Stephanny is a senior manager in the State andLocal Tax group of KPMG LLP’s Washington NationalTax practice. Amie Ahanchian is a managing director inKPMG LLP’s Trade and Customs Services practice.2 See e.g., KPMG TaxNewsFlash, Legislative update: Com-prehensive tax reform in 2017, predicts Brady (November15, 2016).3 See e.g., Angus Optimistic for Bold Bipartisan TaxReform; Tax Notes Today (October 4, 2016).4 ‘‘GDP Growth Rate in the United States averaged 3.23percent from 1947 until 2016, reaching an all-time high of16.90 percent in the first quarter of 1950 and a record lowof -10 percent in the first quarter of 1958. GDP GrowthRate in the United States is reported by the U.S. Bureauof Economic Analysis.’’ http://www.tradingeconomics.com/united-states/gdp-growth.5 ‘‘If current laws governing taxes and spending did notchange, the United States would face steadily increasingfederal budget deficits and debt over the next 30 years, ac-cording to projections by CBO. Federal debt held by thepublic, which was equal to 39 percent of gross domesticproduct (GDP) at the end of fiscal year 2008, has alreadyrisen to 75 percent of GDP in the wake of a financial crisisand a recession. In CBO’s projections, that debt rises to 86percent of GDP in 2026 and to 141 percent in 2046—exceeding the historical peak of 106 percent that oc-curred just after World War II.’’ https://www.cbo.gov/publication/51580.6 See e.g., Lew Says EU State Aid Issue Could Lead to ‘‘Per-fect Storm’’ for Tax Reform, Tax Notes Today (October 7,2016); In the Tax Foundation’s 2016 International TaxCompetitiveness Index the U.S. ranked 31st out of 35OECD countries. http://taxfoundation.org/article/2016-international-tax-competitiveness-index.7 See e.g., http://www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm.8 Sources of Government Revenue in the OECD, 2016.Tax Foundation Fiscal Fact No. 517, July 2016.9 Catherine Rampell, Ted Cruz and Rand Paul’s hiddentax, Washingtonpost.com (last accessed August 16, 2016).10 House Republicans, A better Way (July 2016), http://abetterway.speaker.gov/.11 H.R. 4377, 114th Cong. (2016), available at http://nunes.house.gov/uploadedfiles/updated_abc_act_bill_text.pdf.12 Sen. Cardin, Progressive Consumption Tax Act of 2016,https://www.cardin.senate.gov/pct. Sen. Cardin originallyintroduced the Progressive Consumption Tax Act in 2014and made several amendments to the original proposal inDecember 2016.13 Rep. Renacci, Simplifying America’s Tax System, http://renacci.house.gov/index.cfm/simplifying-americas-tax-system.14 Martin A. Sullivan, Economic Analysis: A U.S. VAT Maybe Closer Than You Think, Tax Notes (Sep. 19, 2016).15 OECD, Consumption Tax Trends 2016.16 See e.g., Leah Durner & Bobby Bui, Comparing ValueAdded and Retail Sales Taxes, Tax Notes (Feb. 22, 2010).

17 Commonwealth of Puerto Rico Tax Reform Assess-ment Project, Unified Tax Code of Puerto Rico: Tax PolicyImplementation Options – General Explanation of Princi-pal Options, p.5 (Oct. 31, 2014).18 Id.19 Asa Johansson, Christopher Heady, Jens Arnold, BertBrys, and Laura Vartia, Tax and Economic Growth,OECD Economics Department Working Paper No. 620, p.18 and pp. 4245 (July 11, 2008).20 Commonwealth of Puerto Rico Tax Reform Assess-ment Project, Unified Tax Code of Puerto Rico: Tax PolicyImplementation Options – General Explanation of Princi-pal Options, p.4 (Oct. 31, 2014).21 Sen. Cardin proposes to introduce a family allowanceof US$100,000 for joint filers, US$50,000 for singles, andUS$75,000 for head of household filers, which would re-place the personal exemption and standard deduction.22 The rebates would be split into three categories: anearned income amount, a child benefit amount, and anadditional child benefit amount. Rebates would be deter-mined based on a variety of factors: family size, filingstatus, earnings, and adjusted gross income.23 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003); AlanSchenk and Oliver Oldman, Value Added Tax: A compara-tive Approach, Cambridge Tax Law Series, p. 42 (2007).24 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).25 See e.g., GAO, Tax-Credit and Subtraction Methods forCalculating a Value-Added Tax (June 1989).26 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).27 Alan Schenk and Oliver Oldman, Value Added Tax: Acomparative Approach, Cambridge Tax Law Series, pp.8and 43 (2007).28 Alan Schenk and Oliver Oldman, Value Added Tax: Acomparative Approach, Cambridge Tax Law Series, p. 43(2007).29 Alan Schenk and Oliver Oldman, Value Added Tax: Acomparative Approach, Cambridge Tax Law Series, p. 43(2007); Michigan Department of Treasury, Single Busi-ness Tax, available at http://www.michigan.gov/taxes/0,4676,7-238-43519_43533—-,00.html.30 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309-358 (2010).31 Id.32 H.R. 4377, Sec. 1421(c).33 Blueprint, pp. 25–28.34 Martin A. Sullivan, Economic Analysis: GOP Plan No SoEasily Games, Tax Notes (Aug. 22, 2016).35 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003); ItaiGrinberg, Where Credit Is Due: Advantages of the Credit In-voice Method for a Partial Replacement VAT, 63 Tax L. Rev.309-358 (2010); Alan Schenk and Oliver Oldman, ValueAdded Tax: A comparative Approach, Cambridge Tax LawSeries, p. 38 (2007).36 A notable exception is Japan, that uses a form of credit-subtraction VAT that does not rely on VAT invoices. Seee.g., Alan Schenk and Oliver Oldman, Value Added Tax: Acomparative Approach, Cambridge Tax Law Series, p. 41(2007).37 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309–358 (2010).38 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309–358 (2010).

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39 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309–358 (2010).40 See e.g., Sen. Cardin, Progressive Consumption Tax Actof 2016, https://www.cardin.senate.gov/pct; Rep. Renacci,Simplifying Americas Tax System, http://renacci.house.gov/index.cfm/simplifying-americas-tax-system.41 SATS, p. 5.42 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 36 (2007).43 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 36 (2007).44 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).45 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).46 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).47 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).48 See e.g., Commonwealth of Puerto Rico Tax Reform As-sessment Project, Unified Tax Code of Puerto Rico: TaxPolicy Implementation Options Appendix (October 31 ,2014).49 Blueprint, p.25.50 PCT, Sec. 3916.51 See Section II D.52 See e.g., Commonwealth of Puerto Rico Tax Reform As-sessment Project, Unified Tax Code of Puerto Rico: TaxPolicy Implementation Options Appendix (Oct. 31 , 2014).53 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).54 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 183 (2007).55 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 183 (2007).56 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003); AlanSchenk and Oliver Oldman, Value Added Tax: A compara-tive Approach, Cambridge Tax Law Series, p. 183 (2007).57 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309-358 (2010).58 See e.g., Tuan Minh Le, Value Added Taxation: Mecha-nism, Design, and Policy Issues, World Bank (2003).59 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309-358 (2010); Alan Schenk and OliverOldman, Value Added Tax: A comparative Approach, Cam-bridge Tax Law Series, p. 183 (2007).60 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309-358 (2010).61 See e.g., Martin Feldstein and Paul Krugman, Interna-tional Trade Effects of Value-Added Taxation, Taxation inthe Global Economy, Chapter 7, University of ChicagoPress (Jan. 1990).62 OECD, Consumption Tax Trends 2014, p.25; AlanSchenk and Oliver Oldman, Value Added Tax: A compara-tive Approach, Cambridge Tax Law Series, p. 183 (2007).63 PCT, Sec. 3901; Sec. 3911; and Sec. 3916.64 H.R. 4377, Sec. 1423.65 Blueprint, p. 28.66 Id.

67 Id.68 Id.69 See e.g., Itai Grinberg, Where Credit Is Due: Advantagesof the Credit Invoice Method for a Partial Replacement VAT,63 Tax L. Rev. 309-358 (2010).70 WTO Working Party Report, Border Tax Adjustments,L/3464 (Dec. 2, 1970).71 See e.g., Rep. Bill Pascrell, Border Tax Equity Act of2016; Peter Navarro and Willbur Ross, Scoring the TrumpEconomic Plan: Trade, Regulatory, & Energy Policy Im-pacts (September 26, 2016).72 See e.g., Joel Slemrod, Does a VAT Promote Exports?,Tax Analysts (2011).73 See e.g., Robert Goulder, Renacci’s VAT: The Shape ofThings to Come, Tax Analysts Blog, available at http://www.taxanalysts.org/tax-analysts-blog/renacci-s-vat-shape-things-come/2016/08/02/194451.74 For instance, in the EU dividend income is not subjectto VAT as it is not considered an economic activity.75 See e.g., OECD, The Distributional Effects of Consump-tion Taxes in OECD Countries, p. 19 (2014).76 See e.g., OECD, The Distributional Effects of Consump-tion Taxes in OECD Countries (2014).77 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 52 (2007).78 Id.79 Ebrill et al, The Modern VAT, International MonetaryFund, 2001.80 See e.g., Commonwealth of Puerto Rico Tax Reform As-sessment Project, Unified Tax Code of Puerto Rico: TaxPolicy Implementation Options Appendix (October 31 ,2014).81 See e.g., PCT, Section 3916.82 SATS, p. 9.83 See Section II A.84 See e.g., Bruce Bartlett, The Case Against The VAT,Forbes.com (Last accessed Aug. 16, 2016).85 See e.g., Brian Roach, Progressive and Regressive Taxa-tion in the United States: Who’s Really Paying (and NotPaying) their Fair Share?, p.4 (Oct. 20013).86 OECD Tax Policy Studies, The Distributional Effects ofConsumption Taxes in OECD Countries (2014).87 Id.88 Timothy H. Gillis & Harley T. Duncan, Will the UnitedStates Implement a Value-Added Tax?, Bloomberg BNATax Planning International (June 2016) 43 TPIR 17,7/31/16 The authors describe the death of ‘‘tax-policy-only’’ regressivity analysis, noting that much of the worldis now looking at both tax and spending policies.89 OECD Tax Policy Studies, The Distributional Effects ofConsumption Taxes in OECD Countries (2014); OECDConsumption Tax Trends 2014.90 Id.91 OECD Tax Policy Studies, The Distributional Effects ofConsumption Taxes in OECD Countries (2014).92 Christopher Ball, John Creedy and Michael Ryan, FoodExpenditure and GST in New Zealand, New Zealand Trea-sury Working Paper 14/07 (April 2014).93 See Section II D.94 John Rolfe, The Greens and Labor claim putting a GSTon currently exempt items like fresh food is ‘‘regressive’’, buteconomist Alastair Thomas say no, New.com.au (Last Ac-cessed August 15, 2016).95 See e.g., OECD Tax Policy Studies, The DistributionalEffects of Consumption Taxes in OECD Countries (2014).96 John Rolfe, The Greens and Labor claim putting a GSTon currently exempt items like fresh food is ‘‘regressive’’, but

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economist Alastair Thomas say no, New.com.au (Last Ac-cessed August 15, 2016).97 Richard M. Bird, Jack M. Mintz & Thomas A. Wilson,Coordinating Federal and Provincial Sales Taxes: Lessonsfrom the Canadian Experience, National Tax Journal Vol.VIX No. 4 (December 2006).98 See e.g., George N. Carlson & Melanie K. Patrick, Ad-dressing the Regressivity of Value-Added Tax, National TaxJournal Vol. 42 No. 3 (Sep. 1989).99 Martin A. Sullivan, Was the VAT a Money Machine forEurope?, Tax Analysts Blog (Apr. 9, 2012).100 GAO, Tax-Credit and Subtraction Methods of Calculat-ing a Value Added-Tax (June 1989).101 See e.g., Bruce Bartlett, The Case Against The VAT,Forbes.com (Last accessed Aug. 16, 2016).102 See e.g., Alan Schenk and Oliver Oldman, Value AddedTax: A comparative Approach, Cambridge Tax Law Series,p. 52 (2007).103 Directive 98/6/EC of the European Parliament and ofthe Council of 16 February 1998 on consumer protectionin the indication of the prices of products offered to con-sumers.104 GAO, Tax-Credit and Subtraction Methods of Calculat-ing a Value Added-Tax (June 1989).105 GAO, Tax-Credit and Subtraction Methods of Calculat-ing a Value Added-Tax (June 1989).106 PCT, Section 3922.107 SATS, p. 9.108 See Section II A.109 GAO, Tax-Credit and Subtraction Methods of Calculat-ing a Value Added-Tax (June 1989).110 Michael Keen & Ben Lockwood, Is the VAT a MoneyMachine?, National Tax Journal Vol. LIX, No. 4, p. 911(December 2006); see also, Gary Becker and Casey Mulli-gan, Deadweight Costs and the Size of Government, NBERWorking Paper No. 6789 (1998).111 Michael Keen & Ben Lockwood, Is the VAT a MoneyMachine?, National Tax Journal Vol. LIX, No. 4, p. 911(December 2006).112 Michael Keen & Ben Lockwood, Is the VAT a MoneyMachine?, National Tax Journal Vol. LIX, No. 4, p. 911(December 2006).113 Martin A. Sullivan, Was the VAT a Money Machine forEurope?, Tax Analysts Blog (April 9, 2012).114 PCT, Section 301.

115 SATS, p. 9.116 See e.g., Luca Barbone, Richard M. Bird & JaimeVasquez-Caro, The Cost of VAT: A Review of the Literature,CASE Network Reports No. 106/2012.117 See e.g., Luca Barbone, Richard M. Bird & JaimeVasquez-Caro, The Cost of VAT: A Review of the Literature,CASE Network Reports No. 106/2012.118 GAO, Value-Added Tax Administrative Costs Vary withComplexity and Number of Businesses (May 1993).119 See e.g., Luca Barbone, Richard M. Bird & JaimeVasquez-Caro, The Cost of VAT: A Review of the Literature,CASE Network Reports No. 106/2012.120 GAO, Value-Added Tax Administrative Costs Vary withComplexity and Number of Businesses (May 1993).121 See e.g., Commonwealth of Puerto Rico Tax ReformAssessment Project, Unified Tax Code of Puerto Rico: TaxPolicy Implementation Options Appendix (Oct. 31 , 2014).122 PCT, Section 3913.123 SATS, p. 7.124 SATS, p. 5.125 World Bank Group, Paying Taxes 2016, available athttp://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2016.pdf.126 See e.g., William Hocke, EU’s Moscovici Lays Out Wide-Ranging Agenda, Tax Notes (October 24, 2016).127 See e.g., Timothy H. Gillis & Harley T. Duncan, Will theUnited States Implement a Value-Added Tax?, BloombergBNA Tax Planning International (June 2016); Michael J.Graetz, VAT as the Key to Real Tax Reform, Tax Analysts(2011).128 Adam Smith, The Wealth of Nations (1776).129 See e.g., Timothy H. Gillis & Harley T. Duncan, Will theUnited States Implement a Value-Added Tax?, BloombergBNA Tax Planning International (June 2016); Michael J.Graetz, VAT as the Key to Real Tax Reform, Tax Analysts(2011).130 In Canada, the provinces can opt to harmonize theirprovincial consumption tax with the federal GST. More-over, India is currently undergoing a major tax reformthat would introduce a harmonized dual GST system forthe federal and state governments.131 Act. No 72-2015 (May 29, 2015).132 Substitute bill 2032, 2838, 2839, 2840 (May 26, 2016).

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