Summary: Congress has recently considered introducing a value-added tax in the United States with compensatory rate reductions in corporate and personal income taxes and Social Security taxes. The proposed tax changes are aimed at increasing domestic savings and capital investment, and thereby improving industrial productivity and the trade competitiveness of U.S. goods. GAO studied value-added tax systems and their administration in seven European Economic Community countries.
Experiences with government administration and business compliance differed among the countries. Government representatives generally agreed that the tax was not more costly to administer than the consumption taxes it replaced. Each of the governments instituted special programs and procedures to ease business compliance with the tax. Multiple rates for domestically distributed goods and services and partial exemptions are the primary contributors to administrative and compliance difficulties. Other factors which cause difficulties included frequent rate changes, the absence of a separately stated value-added tax on retail invoices, and nonstandardization of invoices. Business representatives in some countries claimed that government filing and reimbursement procedures reduce business cash balances by requiring prompt payment of excess value-added tax receipts, while the government delayed refunds. Each of the countries reported tax evasion, particularly in the service sector, and tax fraud in connection with the tax. The economic impact of adopting the value-added tax depended not only on the tax system's structure and administrative regulations, but also on the tax it replaced and the domestic economic situation. The governments use the value-added tax to generate revenue and to implement economic policy. The introduction of the value-added tax had a negligible effect on the countries' trade competitiveness, and did not always result in significant price increases because its imposition was accompanied by offsetting reductions in other consumption taxes.
