An Evaluation of the value added tax in the fiscal structure of a state

Material Information

An Evaluation of the value added tax in the fiscal structure of a state Florida, a case study
Alternate Title:
Value added tax in the fiscal structure of a state
Grasty, William Joseph, 1934- ( Dissertant )
Goffman, I. J. ( Thesis advisor )
Stone, W. E. ( Thesis advisor )
Benninger, L. J. ( Reviewer )
Blodgett, Ralph H. ( Reviewer )
Wilmot, W. V ( Reviewer )
Fristoe, C. W. ( Reviewer )
Place of Publication:
Gainesville, Fla.
University of Florida
Publication Date:
Copyright Date:
Physical Description:
ix, 264 leaves. : illus. ; 28 cm.


Subjects / Keywords:
Business structures ( jstor )
Corporate income taxes ( jstor )
Corporations ( jstor )
Income taxes ( jstor )
Property taxes ( jstor )
Sales taxes ( jstor )
State income tax ( jstor )
Taxes ( jstor )
Value added ( jstor )
Value added taxes ( jstor )
Accounting thesis Ph. D ( lcsh )
Dissertations, Academic -- Accounting -- UF ( lcsh )
Taxation -- Florida ( lcsh )
bibliography ( marcgt )
non-fiction ( marcgt )
theses ( marcgt )


Thesis -- University of Florida.
Bibliography: leaves 253-264.
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April, 1967


Shirley, Joey,
Sally, Christopher,
Mary Jennifer,

whose untiring love and patience permitted this study

to be completed.


The author wishes to express his sincere appreciation to Or.

I. J. Goffman and Dr. u. E. Stone, the chairman of his supervisory

cananittee. Vrthout their patience, encouragement, and guidance this

study could never have been completed.

Appreciation Is also extended to Dr. L. J. Senninger, Dr. R. H.

Biodgett, Dr. C. W. Fristoe. and Dr. W. V. WI Imot, who served as members

of the supervisory committee, for their encouragement and criticismrs.

Thanks are extended to the Haskins and Setts Foundation, the

Earhart Foundation, and the University of Florida for making evallable

the finances necessary to attend Graduate School.

The author wishes to express his appreciation to hiss Charlotte

Isbill for the long hours she spent typing the final draft.

While many individuals aided in the completion of this study,

any errors of omi ssion and comirsson are the sole responsible ity of

the author.



ACKNDWLEDGMENTS ........................, fit

LISTOF TABLES. ........................ viff


I INTRODUCTION..,......,............. 1

Historical Background of the Value
Added Tax ..,................ 2
Purpose ..................... 10
Hypotheses ................... 11
Source Matereial...........,..... 11
Chapter Organization. . ... .. .. 12


Introduction. ,.........,........ 14
The Problem of Administration . .. ... 16
Types of Velue Added Tax. . . .. . 18
The Consumption Type. . .. . . 18
The incrmeType ............... 19
Methods of Calculation of Value Added . .. .. 23
The Addition Method ... . .. .. 2)
The Subtraction Method. .. .. .. 24
The French Method ,. .. .. .. . .. 24
Choice Among Alternatives . .. . ... .. 25
Summary .......,........... .. 29


Introduction... .. 31
Shifting and Incidene. 33
Principle of Neutrality ............. 38
Integrated vs. Non-integrated Firms .. 40
Labor Intensive vs. Capital Intensive Firms 43
Profitable vs. Unprofitable Firms ,. .. ... 45
Forms of Business Organization. .. .. 50
Regressivity Argument . .. . .. .. .. 50
Burden on New Businesses. .. .. .. 52




Ill Avoidance of "Ctascadd' Elements and
Pyramiding ................... 55
Equity ................... ... 56
Summary. ................... .. 59


introduction .. .. .. . .... . .. 61
The Japanese Value Added Tax .. .. . .. 62
Provisions of the Japanese Value Added Tax . 64
Factors Contributing to the Repeal of th~e
Value Added Tax. .............. 70
The French Value Added Tax ... . .. .. .. 72
Historical Background. .. .. .. .. .. 72
Provisions of the French Value Added Tax .. 77
The Michigan Business Activities Tax .. .. .. 85
Provisions of the Michigan Business
Activities Tax ............... 88
Yield of the Michigan Business Activities
Tax. ................... 93
Evaluation of the Michigan Business
Activities Tax ............... 98
SU~mmay .. .. . .. .... ... ... .. 103

AN EVALUATION--1 ................... 109

Introduction ................... 109
The Property tax ................. Ill
Homestead Exemption. .. .. ... .. .. 318
Personal Property. .............. 120
intangibles Tax. ............... 122
Overview of the Property Tax ... .. .. 125
Sales and UseTax. ................ 127
The Motor Fuel Texes ,. ... .. .. .. .. 133
The Clgarette Tax. ............,... 136
Alcoholic Beverage Taxes .. .. .. .. ... 138
Motor Vehicle Licenses . .. ... . .. ... 140
Parl-muKtual Taxes. ................ 142
The Documentary Stamp Tax. .. .. .. .. .. IMS
Insurance Premium Tax. .. . .. . .. 145
Other Taxes. ................... 146




AN EVALUATION--2. .. .. ... .. .. .. .. 149

Introduction. .................. 149
The Tax Load. .................. 149
Income Elasticities of the Various Taxes. . .. 153
Florida's Need for New Taxe. .. . ... 158
Does the Tax System As It Now Exists
Provide Adequate Revenue? .. .. . ... 158
Does the Tax System Provide Equity In
the Distribution of the Tax Burden? . .. 162
Is Economic Efficiency Provided with the
Tax System As It Now Exists?. . . . 166
Is There Ease In the Administration of
and in Compliance with the Existing
Tax System? ................ 168
Some Possible Future Taxes In Florida . ... 171
Summary.................... 173

VII A PROPOSAL FOR FLORIDA. .. .. ..... . .. 176

Introduction. .............. .... 176
Value Added Tax vs. Corporation Income Tax,. . 177
The Tax Base. .................. 183
Other Features of the Proposed Value Added Tax. 188
Type. ................... 188
Method of Calculation of Value Added. . .. 188
Origin or Destination Principle .. .. .. 189
Special Problems Under the Value Added TaK. 190
Stabi lity in the Fiscal Structure .. .. .. 193
Constitutionality of a Value Added Tax in
Florida ................ .... 194(
Allocation of interstate Business . .. .. 195
Possibility of Exporting the Tax. .. .. 196
Summary.. ................ 200

VIII SUMMARY...................... 203



APPENDICES. .. .. .. ... .. .. .. .. . ... .. 211

A THE CORPORATE INCOME TAX.. .. .. .. . .. .. 212
D TABLES 19THROUGH 26. ................ 240

818LlOGRAPHY................... ....,,, 253


Table Page

OF VALUE ADDED TAXES. ................. 22


FRENCH VALUE ADDED TAX. ... ... .. .. .. 81


OWNERSHIP, FISCAL 1963-64 .. .. ... .. .. 95

JUNE 30, 1964 ................... 96

PAYMENT, FISCAL 1963-64 .. .. .. .. .. .. .. 97

COLLECTIONS FOR FISCAL YEAR 1965-66 .. .. .. .. 112




FOR FISCAL YEARS 1955-56--1964-6j5, STATE OF FLORIDA 154


STATE OF FLORIDA. .................. 160


Table Page

15 VALUE ADDED IN FLORIDA, 1964. . .. .. . . 180

TAM PURPOSES. ................... .. 185

INCOME TAX PURPOSES . .. ... .... .. . .. 187

18 INDICATORS OF SHIFTINS............,..... 222

FISCAL YEARS 1955-1965, STATE OF FLORIDA. .. .. .. 241

FLORIDA .............,........... 243

STATE OF FLORIDA. ................... 244

STATE OF FLORIDA, ..........,......... 245


FEES, 1966 RATES. ..........,......... 250

1955-1965 ...........,....... .... 251

VARIOUS TAKES. ,............,,.. 252



Over the past thirty years there has been considerable growth

in governmental expenditures at all levels of government in the United

States and It is expected that this growth will continue at a rapid

pace Into the future. Many of these governmental unt ts have found

themselves in a critical position In raising the necessary revenues to

finance ever Increasing expenditures. Florida is no exception! Her

revenue needs have been increasing rapidly and there are strong Indi-

cations that new revenue sources will have to be found in the near fu-

ture if the State expects to continue to provide the desired services.

The question is, from where will this new revenue come?

The answer to this question, of course, Is not a simple one.

Realizing this, Governor Burns appointed a study committee In 1965 to

make recommendations to the 1967 legislature on the tax situation in

Florida. The 1967 legislature is not legally bound even to consider

the recommendations of this cormmttee but indications are that It willI

do so. A possible solution to the problem is to find a broad based

tax that would yield the necessary revenue and not place an undue bur-

den on the Florida economy. One such tax which could fulfill these

needs is a value added tax.

Historic41 Blckground of the Value Added Tqx

Though the value added tax has been the subject of considera-

ble discussion In the past few years, its basic nature was conceived

almost fifty years ago. A form of the value added tax was proposed

for Germany as early as 1919 by the German industrialist St. von Siemens

as ai substitute for the then newly Introduced Umpaetzsteuer.1 The von

Siemens proposal Involved the direct application of the tax rate to a

calculated value added. This proposal was rejected, however, in favor

of a reduction In the rate of the existing Umsatzsteper. The basic

reason for this rejection, according to Professor Due, was the fear of

the admninstrative difficulties It would involve.2

Apparently the first proposal for the value added tax in the

United States was made by Professor T. S. Adams short ly after the von

Siemens proposal for Germany. Although Professor Adams first hinted

at a value added tax In an address before the National Tax Association

in 1917 when he said that in business taxation the government should

"insist strictly upon the taxation of salaries, rentals, and interest

at source,"3 It was not until 1921 that he explicitly outlined the gen-

eral base for the value added tax. This outline is given below:

IJohn F. Due, SaesTatl (Urbana: University of illinois
Press, 1957), p. 66. The Umsatzsteuer in its "purdl form Is a turn-
over tax which apples at a uniform rate to all sales at all stages In
production and distribution. The German model was slightly modified
from the pure form but the basic principle was still present.

3T. S. Adams, "The Taxation of Business," Proceedinas of the
lilth Annual Conference, National Tax Association (New Haven, Connec-
ticut, 1918), p. 193.

In the case of producers and sellers of "goods,
wares and merchandise" further simplicity could be
achieved, If desired, by giving the tax the form of a
sales tax with a credit or refund for tax paid by the
producer or dealer (as purchaser) on goods bought for
resale or for necessary use in the production of goods
for sale. It will be noted that the proposed tax on
approximatee net iancoe" avoids the strongest arguments
against the turnover or sales tax, namely, that It would
be pyraelded, create a grossly unfalf compete tion be-
tween synthesized and single~process industries, and ex-
emnpt those occupations or transactions such as banking,
advertising, professional service and the like in which
the profit or gain does not arise from a "sale." The
worst features of the turnover tax arise from Its appll-
cation to "cost of sales, which would of course be sub-
tracted or elief nated under the proposed made here.'

Professor Adam~s' proposed bears a striking resemblance (as will

be shown later) to the value added tax system that has been adopted in

France. He realized that his proposal had little if any chance of be-

Ing adopted at that time. This proved to be correct but evidently It

led to another proposal made by Mr. Charrles J. Tobin, a tax attorney

and counsel for the New York State Tax Conmission, at the 1929 meeting

of the National Tax Association. He called his proposal a production

tax and It was made with the idea of tax refona In New York In mind.

He stated that:

A tax on "production" would be b better base than
not Income because It would require every corporation
In the class to pay something tourard thle support of the
government. Production base should neither be the not
f r,rase base nor the gross sales base. .. The "produc-
tlon" base should be a gross sales base less the cost
of the material and supplies entering into the manufacturing

.T S. Adams, "Fundamental Problems of Federal income Texa*
tion, Querteriv Journal of tononoics. XXXV (August, 1921). 553.

of the product, the sale of which Is subject to the
production taxes.5

Mr. Tobin's proposal had been endorsed, before its presentation

at this meettng, by the members of the New York State Tax Cormission.

They had made this endorsement through a recommendation of It to the

New York Legislature as a measure of tax reform for the state.6 nr 4

F. Roller, a tax attorney for the General Electric Company also

strongly endorsed Mr. Tobin's proposal at the 1929 meeting. This can

be seen from the following statement.

Ve believe If you took the gross sales and deduct
from that the cost of material and supplies that go into
those sales, you will have a base that will apply to all
taxpayers In a class. you reduce your pyramiding to a
minimum, you get away from net Income, which can be
evaded and which only results In at tax upon those whose
reports show aproflt.'l

Three years later the institute for Government Research of the

Brookings Institution, In its study Taxetion of the State government

of Alabama. proposed a tax on the "net value product" as a part of the

reform It suggested for Alabama. Specifically, the report stated that:

Net value product overcomes many of the most rseri
ous difficulties involved in gross sales wrhen used as
the base of business taxation. it eliminates the py-
ramiding of the tax. It makes allowances for differ-
ences in the rate of Inventory turnover. It Is at the
same time easily determined, since even the most rudi-
mentary accounting systems will provide the data of pur-
chases as well as of sales. It has the added advantage

Scharles J. Tobin, "The New York State Tax Sltuation as Viewed
by the Taxpayer," Procqeding~ of the Twenty-second AnnualCofrce
~S9 (National Tax Association), pp. 101(-105.

6Roscoe Arant, "The Place of Business Taxation in the Revenue
Systems of the States," Taxes--The Tax Magazine, XV (Aprl1, 1937), 199.

7Tobin, on i., p. 126.

of providing at least a rough check on the tax returns,
since the purchases allowed as deductions on certeln
returns may be checked against the gross sales of other
On the other hand net value product overcomes many
of the disadvantages of net income. It eliminates the
allowance for depreciation, obsolescence, and depletion.
It is simpler to compute than net income. While It
might be more variable than gross sales, it would not
be as variable as not income. Consequently, It would
provide a reasonably stable revenue base for a state.

In 1934, Professor Gerhard Colm proposed for the United States

a tax based on the value added by manufacture* and restated his post-

tion in favor of this tax again In 1939 In his article "The Basis of

Federal Fiscal Policy.. 10 his position both in 1934 and 1939 was that

a tax based on 'Value added by manufacture,' i.e., the sum of wages

and interest and profits, appears to be the most eqluitable form of

business taxation...II n fact, he emphasized the idea that these taxes

should become the backbone of state tax systems. This, of course, has

never come about.

In 1937, Professor Arant made a study of the place of business

taxation in the revenue systems of the states and concluded that of the

various fonus of business taxation aval lable to the states the "net

value-product appears to be the most widely applicable, the most

$rookings Institution, institute for Government Research,
Tentio oftheStae Gvermen ofAlabqmg, tV (Montgomery, Alabama:
Wilson Printing Company), 339.

9Gerhard Colm, The Ideal Tax System." Socila Research. I
(February, 1934), 329.

10Cerhard Colm, "The Basis of Federal Fiscal Policy," ],gagg--
The Tax Mearzine, XVI I (June, 1939), 338-340, 369-370.

equitable, and the most economically sound taK base yet proposed.

"2Professor Arant seemed, however, to be somewhat mre~r cautious

in his endorsement of the value added tax than the other proponents up

to that time and he enumerated uhat he considered to be several Impor-

tant weaknesses or limitations.l Even after recognizing these I~mite-

tions, though, he still concluded that the value added tax base was


These proposals all appear to have received only passive atten-

tion at the time they were discussed and it was not until 1940 when

Professor Paul Studenski presented a detailed analysis of the value

added tax that It received the recognition it most assuredly deserved.14

That Is, his article (proposal) seemed to receive objective rather than

passive attention and appeared to renew the Interest that had been

shown whecn the tax was first proposed by von Siemens and Professor

Adans. Professor Studenski's proposal will be discussed further In

Chapter Ii.

At about the same time that Professor Studeonski was formulating

his proposal another proposal was being formulated by Mr. Wadsworth bl.

Mount, a management consultant. In 1941 M~r. Mount made his proposal

to United States congressmen but this proposal, even though it was sup-

ported by several congressmen, failed to produce any legislation, tils

12Arant, on g ., p. 242.


14Paul Studenski, "Toward a Theory of Business Taxation," J~pgy,
nral qf Pol iti ca Economy, XLVI ll (October, 1940), 651.

proposal was to levy the tax on the value added to Its product by each

business unit regardless of how it ran Its internal affairs. He


To determine this actual production for each bust-
ness unit is a matter of finding out wh~at added wealth,
or added value, is given to the products or services
handled by each business due to its operation during
the tax accounting period. This figure is readily ob-
tained by deducting from the figure of gross receipts
from sales and other income, for the tax period in
question, all costs and expenses which are paid to peo-
ple gggggd that business unit. This means that costs
of raw materials, insurance, rent, advertising, all
other taxes, freight wrhen handled by outsiders, etc.,
would be deducted. The balance remaining, which is
that part of the gross receipts from sales and other
income which is available for use by the people in
business, represents the money value added to the prod-
ucts of that particular business by all the people em-
ploying their money or time therein.
How each business uses this "inside remainder of
added value" is Its ownr affair and does not enter into
the computation of this tax. Out of this sum mumst come
all incomes of everyone connected wi th each bus iness,
including wages, salaries. interest on Invested capital
and dividends, except when payments are made out of
capital. To tax this figure of "added value" In every
type of business would involve a tax on everyone con-
nectd with that business in a most fair and simple maen-
nor as it resulted In reducing at the source the amount
of mneny available from current production for distrl*
button to those deriving income from each business unit.
This tax is based upon the fundamental by ilness reall*
ties of cash receipts and cash payments.'

Although considerable interest was generated, Congress made no

legislative move to utilize the value added tax. With the beginning of

World War 11, the discussion of this tax was pushed into the background

and lay somewhat dormant until the production tax was levied In France

15Wladsworth W. Mount, "A Re-examination of Taxation Fundamen-
tels," Financial M~aneoement Seri~es No. 67 (New York: American Manage-
ment Association, 1941), pp. 11-12.

In 1948. Interest in and discussion of the tax were further stimulated

by the issuance of the Shoup Mission Report sponsored by the Supreme

Commonder for the Allied Powers (SCAP). This report contained recom-

mendations for the use of a value added tax as a part of the reform

proposed for the reconstruction of the Japanese Tax system in 1950.

Although the value added tax was strongly recommended by the Shoup Mis*

sion and endorsed by the SCAP It failed to gain the necessary support

from the Japanese leaders in the Diet and particularly from the general

population of Japan and thus was officially abandoned by the Diet in

Even though it appears to have been generally accepted that the

French value added tax (which was officially adopted with the refonn in

1954) grew out of the production taK Of 1940, at l945t one American and

one French tax economic st have suggested that It goes as far back as

1936.17 Regardless of when the value added tax (la taxe sur la yeleur

alue)actually was adopted In France, there Is Ilttle if any doubt

that It was the first real experiment In the use of the value added tax

In the fiscal structure of an economic entity on a major scale.

in the United States the first and only major attempt to use

the value added tax has been the Michigan Business Receipts TaK that

was passed by the Michigan Legislature In 1953 In a compromise to ward

16M. Bronfenbrenner, "The Japanese Value-Added Sales Tax," gI-
tiqnal Tax Journal, ill (December, 1950), 293.

17Martin Norr, "Sales Taxes in Europe and Ceneda," WS~~~
the 1962 Conference (Canadian Tax Foundation, 1963). See also Charles
Campet, "Quelques Aspects Economlques de la Taxe Francaise Sur la
Valeur Ajoutee," Public Finance, XII, No. i (1957). 26.

off the corporation income tax.l Although thre Michigan tax is called

a business receipts tax It is a hybrid form of the value added tax.

This will be shown in the discussion relating to the practical appll-

cations of the tax In a later part of the paper.

The only other specific use of the value added tax by a govern-

ing body is In the European Coal and Steel Comunity which has adopted

It as Its sole source of revenue. The value added tax, however, has

been proposed for use in several of the Common Market countries as a

means of tax harmonization and It has specifically been proposed for

adoption In Germany. 9

From the time the production tax was adopted in France, there

has been a continuous discussion carried on in the tax and ecou~rtic

literature as to the merits and demerits of the value added tax. Pro-

fessor Nicholas Kaldor proposed an expenditure tax for England which

was relatively close to the value added tax in 1955.20 Professors

Norr, Due, and S~ultivan, all noted tax economists have made strong

lPeter A. Firmln, The Michloan Business Receipts Tax (Ann
Arbor: University of Michigan, 1953).

19Maurice E. Peloubet, "An Alternative to the Present Corporate
Income Tax," Prf ce waterhouse Review, Vill (Winter, 1963), 12.

20Nilcholas Kaldor, An Expenditure Tax (London: George Allen
and Unwin, Ltd., 1955). Their similarity rests in that both taxes
would supposedly place the final burden on the consumer as a user of
the market place and both taxes would spare savings. The expenditures
tax would tax the consumer direct while with the value added tax, the
burden would be shifted to the consumer indi rectly. Professor Kaldor's
expenditures tax would have been progressive and was proposed to elim-
Inate a part of the Income tax.

arguments for the value added tax.21 Maurice E. Peloubet. e leader In

the accounting profession, made a strong proposal to substitute the

value added tax for the corporation Income tax In 1963. He said:

In my opinion, the corporation incme tax should be
recognized for what it Is, a capricious and inequitable
excise tax levied on an unstable base. it should be re-
pealed and a broadly based, equitable and productive tax
scasthe value added tax should be substituted for

There have been several other proposals along this line which show the

Increasing interest that has been developing around the value added tax

In recent years.23

It Is the purpose of this study to evaluate the value added tax

which could be used to raise the necessary additional revenue for the

state of Florida. The value added tax will be compared with a less

broadly based tax--the corporation income tax. Conceptually the value

added tax Is very simple. It is a tax on the value added by a business

21See~for Instance, Martin Norr "Sales Taxes In Europe and
Canda, Reortof he 962Conerece Canadian Tax Foundation, 1963);
JonF De eles Taxation (Ubn:University of illinals Press,
1957); and Clara Sullivan, "Sales Taxes In Europe and Canada, 38291
of the 1962 Conferencq (Canadian Tax Foundation, 1963).

22Peloubst, on g., p. 19.

23See, for example, Richard Y. Lindholm, "Adjusting the Posture
of the U. S. Econoy to Facilitate Corporate Freedom In international
Actions," ePaers and PocensofteTetfurhAua etn
(New York: Amlerican FiTnance Asociation, a;y, 19~66) p 5-6;
R. Prest, "Value Added Taxation Coupled with a Reduction in Taxes On
Business Profits," British Tax Reviewr (September~ctober, 1963), pp.
336-347; and Research and Policy Commilttee, etrDtnei eea
T~axes on Business (Cormmttee for Econmic Deverlopment. April, 1966).

firm to its product, measured in the aggregate by the sum of wages,

rent, interest, and profits.

This study will attempt to determine whether or not the value

added tax can fulfill the future revenue needs of Florida and whether

or not it will fit Into the fiscal structure of the state. This Is

accomplished through an evaluation of the current tax structure and an

empirical study of the tax as It would be applied to the Florida econ-

omy. The empirlical study uses data from the most current year for

which the necessary data are available.

The study will concentrate its attention on the "true" value

added tax rather than on rsoe type of hybrid form such as the Michigan

Business Receipts Tex.


There ear two major underlying hypotheses in this study. One

Is that florida will need additional tax revenue to provide the neces-

sary public services In the near future and that the existing taxe sys-

tem will be unable to fulfill these needs. The second Is that a broad-

based tax wi ll be necessary to fulfilli these revenue requirements and

that a value added tax will meet these requirements better than the

other taxes available, especlelly a corporate Income tax.

Source Materlal

This study draws heavily on the literature relating to the

value added tax and the corporation Income tax as discussed In the

various economic and accounting publications. The emnpirical data re-

lating to the Michigan Businessr Receipts Tax are acquired through the

use of documents published by the state of NIlchigan, particularly the

Michigan Departmntn of Revenue, and from correspondence with Mr.

Clarance W. LoLIk, Commissioner of Rleven~ue for the state of Michigan.

Empirical data relating to the Florida tax system are acquired from

official publications of the state, from the bureau of Economic and

Business Research, University of Florida, and various other sources.

Also many unpublished studies relating to the Florida tax system are


Chapter Oraanization

This study Is basically divided Into two parts. The first

part consists of Chapters I though IV and the second consists of

Chapters V through VIl withl Chapter VItI presenting the siunnary of

the study. Chapter 1, In addition to the Introductory material, gives

a brief historical background to the value added tax since its first

major consideration In Germany In 1919, Chapter II discusses the

various theories of the value added tax as they have been presented In

the literature. The different versions of the tax ore presented as

are alternate methods of calculating value added. Chapter lIt gives

an overall evaluation of the value added tax and discusses the numamous

problems that arise from Its use. Of particular interest in this

chapter Is the problem of shifting and Incidence and thle possible prob-

lemn of equity that might arlse. An appendix to the study gives a brief

discussion of the corporation income tax. This discussion is designed

to serve as a frame of reference for comparison of the value added tax

and the corporation income tax.

Chapter tV discusses the two major applications of the value

added tax :T!e Michigan and French taxes) and the Japanese proposal

which was adopted by the Biot but wlhfch was never implemented.

Chapter V gives a dostfription of the various taxeso in the

Florida system, presents the criteria for evaluation of the Florida

system, and begins the evaluation of the system. Chapter V1 completes

the evaluation using, in addition to the criteria set forth in Chapter

V, certain other analytical tools. Chapter Vll presents a proposal

for Florida comparing the estimated yield from a value added tax to

the estimated yilod fomn a corporation Incaoe tax. Also the various

problems in dealing with a value added tax in a state economy are dis*

cussed. Chapter Villi presents the summary of the study.




We have seen that there has been much interest in and discus-

slan of the value added tax since the turn of this century and even

a~re so since the Implemlentation of the French value added tax In 1954.

In this chapter, this tax wi ll be described and analyzed theoretically.

Broadly defined, the value added tax Is a tax upon the final value of

the product to the firm less the value purchased from other firms.

Professor Paul Studenski has given the following succinct description

of I t:

It can be described as the gross sales of a concern
less the cost of materials and services procured from
other enterprises for use in production. It represents
the net value of the labors of the establishment itself
without anly admilxture of the labors of other establish*
meants and Includes, in the main, the cost of labor, man-
agement, and capital employed by the enterprise and the
returns due to the entrepreneur as a reward for his con-
tributton to production.'

Simitlarly. In his description of the value added tax as It Is

levied in France, Professor martin Norr stated the following:

The value-added tax is a tax on sales, In France
it is levied only on sales at the lmaufacturing and
wholesale levels; there are some exceptions that need
not detain us. But although this is a tax on sales, It
Is so arranged that it does not apply in any particular

IPaul Studenski, "Toward a Theory of Business Taxation," ARE*-
1141 of Political Economy,. XLVIII (October, 1940), 648.

case to the total sales price received by the seller.
The tax applies only to the value added by the seller-*
that is, to the difference between the amount that the
firm takes in In sales proceeds, and the amount the fire
spends to buy materials and services from other finns.
Let's descend to the concrete. Suppose the factory
selling price of a car is $1,000. Suppose the cost of
the materials that went into the car--fenders, paint,
glass., tires, parts, and so on--is $400. Then the value
added is the difference between the receipts of $1,000
and the expenditures of $400; w~hen the car Is sold, the
seller pays tax not on the selling price of $1,000, but
on the value added, the difference, of $600. value added
Is equal to the total amount: of wages, salaries, rent,
interest and similar outlays of the firm. Increased by
the amount of profits earned. instead of striking the
whole sales pries charged by the seller, the value-added
tax in effect strikes only his gross profit*-gross re-
ceipts less estr of goods purchased. x

with this background we can derive a definition of the value

added tax that is workable. It may be defined as a tax on the sum of

the distributive shares**wages, rent, interest, and profits. Value

added defined In this manner would usually be positive even when profits

are zero or negative. "It utilizes as its base the economists' con-

cept of value-added by manufacturing or commercial activity."f

This conceptual simplicity should not be taken too, lightly,

however, since there are some problems that must be solved before an

attempt can be made to measure value added. Onre problem has to do with

the nature of the monetary unit, that Is, whether constant or current

2Martin Norr, "Sales Taxes in Europe and Canada," Report of the
1967. Conference (Canadian Tax Foundation, 1963), p. 247.

3Richard E. Slitor, "The ValueAddead Tax as an Alternative to
Corporate Income Tax, Ts9K@ ,~y XXX (October-November, 1963), 3.

dollars should be used.4 A second problem deals with the administra-

tion of the tax.

The Problem of Admniastration

There is another problem that should be considered. This other

problem deals with administration. Theoretically the tax should be

levied on all value added (real or money depending upon the tax base

choice) regardless of the size of the firm. And this could probably

be implemented without too much trouble. This was emphealzed by Pro-

fessor Studenski In his analysis. He stated:

The tax can be applied even to the smallest business
concern whose accounting may be quite perfect. For
every business however small, has some record of its
sales and invoices or bills of Its purchases.5

Whether or not the levying governmental body would want to go

this for with the tax would depend upon many factors such as, cost of

a Yilue added for tax purposes could be el ther mronrey value added
or "real" value added, that is, value added based on a constant pur-
chasing power of the monetary unit. Since the proposal under considerar-
tion Is for state tax purposes. It Is assumed that money value added
wurrld be the pmoper base. This assumption could certainly be chal-
longed and If the tax were to be a national tax a strong case could be
made for using "real" value added as the tax base. A brief example
using a highly simpilfled situation and using only depreciation can 11-
lustrate this problem of measuring value added under changing price
Price Level 100 il 9
Value added before depreciation $1,000 $1,000 $1,000
Depreciation based on historical cost 200
Depreciation adjustled for price level
changes 2 180
Value added tax base 0 8 2
It can be seen from the above example that If a money value added tax
base is used, firms would be "over taxed" In periods of Increasing
prices and "under taxed' In periods of decreasing prices. Thus an ad*
Justment would be Justified. v

S5tudenski, oo c. p. 649.

laplemnentation, attitude toward taxing small businesses, and other ad-

ministrative difficulties. The administrative difficulties found in

dealing with a very large number of small businesses would probably

force the taxing authority Of most countries to set a level of value

added before the tax would apply at a level high enough to eliminate

from the base many of these small businesses. This, however, Is not

necessary as far as the implementation is concerned (art least not In

the United States or states within the United States with the highly

developed methods of auditing the taxpayers). Also it should be noted

that if all businesses, regardless of size or the amount of value added,

were subject to the tax than the total product of the economy would

bear at least some tax. This was pointed out by Professor Shoup in the

following statement:

Every business firm In the economy adds value to what
It buys from other firms. The total of value added by
all business firms is the value of the total product of
the economy. A general tax on value added is thus a tox
on the total product, the total output of the cannunityb

Also while no one tax can be expected to be fully understood by

all individuals In an economic entity, the value added tax would appear

to impose a minimum strain on a taxpayer's understanding. In fact, one

Canadian accountant has made a very strong statement along this line.

he says, in speaking of the simplicity of the value added tax, that

"Certainly, as compared to the present system, the difference would be

6Carl S. Shoup, "Theory and Background of the Value-Added Tax,"
Progqdings of the Forty-signhth Annual Confernce, 1955 (National Tax
Association, 1956), p. 7.

such that serious unemplloyment might arise among the growing body of

tax specialists."7

Types of Value Added Tax

in surveying the literature on the value added tax, one finds

many variations proposed. Basically these different forms can be

divided into two broad types--the consumption type and the income type.

The Consump~tion Typ~e

The consumption type of the value added tax. represents the

situation where the cost of capital equipment purchased is deducted in

the year of purchase. "It is a consumption type of value-added con-

capt because the value added that is represented by the capital equip-

ment does not appear in the accounts until later years, when the equip-

ment is being consumed in the process of production." In this situa-

tion the value added appears as an increase In income in later years

since there are no deductions in these later years for the using up of

the equipment that is under consideration. This would Impose an addi-

tional burden on businesses due to having to keep additional records to

satisfy this withllolding. Moreover, the value added would be under-

stated for growing flans and overstated for old and/or declining firms.

The French system has modified this somewhat by permitting a deduction

or credit for the anount of the value added tax. that is shifted forward

7D. R. Huggett (ed.), "Tax Review," Canad~qn Chartered Accqynt-
~at LXXXI (March, 1963), 223.

8Shoup, on M ., p. 9.

to the purchaser of a capital asset. For example, If $100 of tax Is

shifted forward, the purchasing firm is permitted a reduction of $100

i n i ts calculated 11ab ility. Under the consumption type of value

added tax, the tax base In any one period is equal to consumption In

that period.9 That is, the tax base Is increased by the amount of the

depreciation deduction that would have been allowed if total purchases

of capital equipment had not been deducted at time of purchase.

The income Type

The income type of value added tax represents the situation

where the cost of the capital equipment purchased is not deducted in

the year of purchase but in later years through depreciation deduc-

tlons. This type Is based on the accounting concepts familiar in com-

puting accounting net income. Moreover, the Income type of value added

tax will1 give a tax base In any one period that will be equal to the

not national Income (disregarding other indirect taxes) created In the

economic entity under consideration in that period.10 The use of the

Income type of value added tax would also eliminate, If followed, the

necessity of establishing additional rules to be followed since estab-

Itshed generally accepted accounting principles could be used. Fol-

lowing generally accepted accounting principles In the implementation

of the tax would be at least one point in favor of the income type

gRichard A. Nusgrave and Peggy B. Richman, "Allocation As-
pects, Domestic and International," The Role 97 Direct eq( (ndjract
Taxes in the Federa Reserve System, National Bureau of Economic Re-
search and the Brookings institute (Princeton University Press, 1964),
p. 89.


since it would not require molr eand expensive records to be kept by

the business firm. If some other base were followed, even though fa-

vorable to some businesses, it would probably be questioned by business

man since mlost business organizations now maintain at least two partial

sets of books (one for financial reporting purposes and one for federal

Income tax purposes). Theoretically it would be easier to justify

following generally accepted accounting practices even though it would

be possible practically to justify following the accounting methods

that ear allowed for federal Income tax purposes. Either of these

methods would be preferable to adding another burden (that Is, another

set of records) to the volumilnous records now required of business

fl rms.

The consumption type of value added tax will give a smaller

value added for a firm in the year of purchase of capital equipment

and a slightly larger value added In later years of the life of the

equipment. The Income type will give the opposite effects--a larger

value added in the year of purchase of capital equipmet and a slightly

smaller value added in later years. Therefore, the taxpayer receives

a slight advantage under the consumption type even though total deduc*

CLons can be made for the equipment over its life under both methods.

This advantage arises out of the Interest factor on the tax saved in

the first year through deduction of the entire cost of the capital

equip pment.

By using a hypothetical case these two, types of the tax can be

easily distinguished.ll For sake of simplicity assume there are two

firms, A and B, and value added tax rate of 10 per cent. Assume fur-

ther that Firm A, in Year One, has no costs except labor costs of $100

(no profits, no loss, no materials, et cetera). Fire 8, in year One,

by using labor only, serlls $3,000 of goods to consumers (again no

profits, toss, at catera). In Years Two Through Eleven, Firm B expands

Its sales to $1,015 through the use of the machine purchased from Firm

A. Ten dollars of this increase in sales represents the, mchine used

up (1/10 x $100) and the other $5 represents interest (assurmed rate of

5 per cent) on the $100 Initial Investment in the machine. This postu-

lated situation is set forth in Table 1.

It can be seen from Table I that the total value added over the

eleven years by both firms under either type of tax is $11,150. If,

however, It is assumed that the taxpayer could reinvest the allowed

deductions for the capital equipment at the assumed 5 per cent inter-

est rate, he would have a $37 advantage under the consumption type.

(The deduction for the purchase of the capital equipment under the

consumption type is "worth $163 and the deductions under the income

type are "worth" $126 over the ten years at 5 per cent.) Whether or

not this Interest advantage would more than offset the cost of the ad-

ditional records, et catera, that would be required due to the use of

the consumption type of tax is a question which would have to be set-

tied In actual practice.

11This hypothetical example and discussion is based on the ex-
ample found in IBP., pp. 9-10.



Consumaption Type Income Type of
of Value Added Value Added
Tax Tax


Firm A Sales (to Finn B) 5 100 $ 100
Bought from other fin ras
Value added M 0
Firm Sales (to consumers) $ 0010 $1,000
Charge for capital
equipment 09
Value added S 9.a.QQDp

Entire Econemy
Total value added $1,000 $1,100
Total retail sales 1,000 1,000
Total i ncome (all wages) g gP


Firm A
(Inactive) Value added $ 0 $ 0
Firm B Sales (to consumers) 1,015 1,015
Charge for capital
equl pIMnt O1
Value added U ~LSf

End re Economy
Total value added $1,015 $1,005
Total retail sales 1,015 1,015
Total Imncoe (wages
$1,000; Interest $5) I.J g0

Source: Carl 5. Shoup, "Theory and Background of the Value-
Added Tax," Procqqdings of Fqrty-nlchth Annurl (opfgrance. 1955 (Na-
tional Tax Association, 1956), p. 10.

Hethods pf Caiculatton qf Velue Added

As was noted above in the discussion of the types of the value

added tax that have been proposed, there have also been proposed a num-

ber of ways of calculating this value added. How should this value

added be computed? Their are basically two methods of calculating

value added; by addition or subtraction. Or, as Professor Lelf Muten

has preferred to call them, by direct or Indirect application.12 In

addition to these two basic methods the French have adopted a slight

modification which will be referred to as the French method.

The Addition Method

in using the addition or direct method, value added for a firm

Is determined by adding together the various elements agese, rent,

interest, and profits) of which it Is composed. While this method ap-

pears relatively simple on the surface, it forces the serious problem

of trying to allocate the distributive shares and therefore the calcu-

lation of profit. Since there Is at present no one definition of

profits upon which all economists and accountants can agree, this

method would probably make the administration of the tax a rather dif-

ficult if not impossible task. If only a rough allocation is required,

however, this method would probably be acceptable.

12Lelf Murten, The Value-Added Tax*4 New Weapon In the Fiscal
Armoury?" Skqndinaviqka Banken, XLIV (No. 2, 1963), 4t2.

The Subtrection Method

The subtraction or indirect method Involves deducting from

gross sales those Items that do not constitute value added. This would

Include items, such as materials and parts purchased from other firms,

lawyers and accountants fees (assuming that the professions are subject

to the tax), and other items of this nature. Under this method, value

added can be calculated without attempting to determine the profits

for the firm.

The French M~ethod

Because of the difficulties involved In the two approaches dis-

cussed above, the French Government has adopted a somewhat modified ap-

proach. In France a business firm determines a contingent liability on

its total sales and deducts the amount of the tax that has been shifted

forward to It on its purchases from other firms and then pays the dif-

farence to the government. (The details of how this tax is shifted

forward in France wlill be given in the discussion of the French value

added tax.) By using this moadification, the French have actually

gotten around the problem of calculating value added. As Professor

John F. Due has said in referring to the French tax:

.. the firm would actually pay tax on the basis of
value added, without the necessity of calculating the
magni tude. Thus the operation of the tax rmuld be very
much simpler, and enforcement would be allad by the abil-
Ity to cross-audit various firms (tax paid to the govern-
ment by pne firm would be reported as tax deducrtions by
others .'3

13John F. Due, Sa~-logTxto (Urbana: University of Illinois
Press, 1957), p. 67.

All the above methods, Including the French modification, would

giver identical results, assuming that all the factors (such as the pur-

chases of capital equipment, increases or liquidations of loventories,

profits, at cetera) are treated the same under each method. The pre-

ferred method would be the method which treats all firms "fairly" and

be as administratively simple as possible. The method chosen should

minimize the cost of compliance and admninstration. From a theoreti-

cal viewpoint, no one method would be preferred over the others.

Cho(-Pc~o nn ALternatives

As was pointed out above, the comnsuption type of value added

tax would cause the value added of growing firms to be understated and

that of old end/or declining firms to be overstated. From at theoreti-

cal standpoint this is difficult to justify. That is, under this type

of tax the firm can decrease its value added during any given period

simply by purchasing more capital equipment. Even though this is dif-

ficult to justify from a theoretical point of view it may be easily

justified from a practical political point of view in that it could be

used as an Investment Incentive. That Is, It could be used to entcee

firms to Invest In "desi red' types of plant and equipment by permi tting

the tax advantage. Under the consumption type, the taxpayer would be

burdened with additional accounting records that would be necessary to

substantlete these additional decreases In the tax base. If past expe-

rience can be used as a guide here, this additional record burden could

became somewhat substant181. All one needs to do to realize thls is to

look at the reports and records that are now required by both the

federal and state and local governmental units in justification of tax

base calculations.

On the other hand, if the income type of value added tax were

followed the value added In any given period by the firm would not de-

pend upon the purchases of capital equipment but upon the actual pro-

duction of value added through the productive process used witrhin the

finn. Also, if the income type were selected most companies would not

be required to keep additional records as they would already have suf-

ficient records (tn most cases two sets) to support the calculations

required under the value added tax. This could be done, as was pointed

out above, by following either the accounting methods used in financial

reporting or the alternative methods used in the calculation of federal

Income taxes. The first would be more easily justified from a theoreti-

cal point of view but the latter might be preferred because of poltti-

cal considerations. For example, there are a number of deductions per-

mitted for federal income tax purposes that are not (or may not be)

made for financial reporting purposes. This, however, is a policy

question and would have to be settled as such.

As was pointed out in the above discussion, the addition method

of calculating value added by a firm to its products forces the m~onu-

mental task of allocating the distributive shares, thus requiring the

calculation of profit. This could probably be done satisfactorily In

the case of corporations If only a rough allocation is desired since

generally these items are broken down In the accounts of the business

and the residual is, the profit of the corporation. This approach would

probably be acceptable since all the Items constitute value added and

the allocation mould not disturb the total value added of the firm of

the amount of the tax if all value added were taxed at the same rate.

It would present an almost impossible task, however, If rate differen*

tlation were used for any reason.

In the case of sole proprietorships and partnerships the situ-

ation becomes more serious. A serious problem encountered here is

that there may not be a clear distinction between which transactions

are business transactions and which are personal transactions of the

owners. There Is also the possibility that the distributive shares

(wages, rent, interest, and profits) would not be broken downr in the

accounts of the firm. Probably the most serious of these would be for

wages as the owners of a sole proprietorship or partnership do not

"dredl a wage like the managers of a corporation. In this situation

as well as that of the corporations if only a rough calculation Is

needed and no tax rate differentiation Is encountered, the addition

method could stilIl be used.

Most of the above difficulties could be eliminated through the

use of the subtraction method of calculating value added. Under the

subtraction method, it would be relatively simple to determine which

purchases had been subject to the value added tax. Therefore, all

that would be required mould be to subtract this amount from the gross

(taxable) sales of the business firm under consideration whether It be

sole proprietorship, partnership, or corporation.

The French method of calculating value added would also be

very simple to imlplement. The only difference in this and the sub-

traction method Is that the tax paid on purchases is used as a credit

against the tax liabllty of the firm under consideration. This method

would require that the tax on the purchases be invoiced separately and

thus would Impose additional bookkeeping details upon the business

final. This factor, however, would provide the levying governmental

body with a useful auditing tool In the assessment and collection of

the tax since tax paid to Fire A by Firm 8 would appear as a credit

against the tax liability of Firm B and would force Firm A to declare

all its sales.

Thus at this stage It appears that the Income type of value

added tax and the subtraction method of calculation of value added

would be the "best" If a value added tax were to be adopted. This Is

the case at least from the point of view of the firm. Frmn the govern-

mental or tax collecting point of view the Income type using the french

method of calculating value added might be preferable due to the

buttt-in auditing check. Also, the French tax-redit method appears

to be the most efficient if rate differentiation Is prevalent at dif*

ferent stages in the production of the product and It appears to ena*

ble the shifting of the tax forward if this ia the desired objective~l4

Other pertinent factors relating to the selection of the Income

type of value added tax and the subtraction method of calculating value

added will be postponed until the discussion of shifting and incidence

and the principle of neutrality in the next chapter.

1 lalra K. Sulllvan, The Tqx on Value Added (New York: Colum*
bla University Pretss 1965), p. 17.


The value added tax may be defined as a tax based upon the

value added by a firm to its product. This value added may be mears-

ured in either real or money terms. The value added tax could be ap-

piled to all businesses regardless of size but due to adlministrative

considerations lt would probably be necessary to put some minimum level

at which the tax would take effect.

There are two types of the value added tex: the consumption

type and the Income type. The consumption type represents the situa-

tion where the purchases of capital equipment are deducted In the pe-

riod of purchase. The Income type represents the situation where the

cost of the capital equipment is deducted over the i~fe of the equlp*

ment through depreciation deductions. Other the rules relating to

financial reporting or to federal Income tax calculations could be used

as a basis for these deductions. The consumption type gives the tax-

payer a slight advantage over the income type due to the Interest fac-

tor on the additional fi rst year deductions.

The value added can be calculated by Llther the addition or

subtraction inethods or the French modif ication. The addition method

presents some serious problems such as the calculation of the profit

of the firm wh ile the subtraction and French methods are ref atively

simple to implement. If all factors were treated thle same under each

of the methods, they would yaied identical answers.

At the present stage of analysis It appears as If the income

type of value added tax using the subtraction or French method of


calculating value added would be preferred. However, other partlnent

factors wl11 be discussed in the next chapter.




Taxation, regardless of Its form, is an economic phenomenon

and wrhen a tax is introduced into a balanced economic system it neces*

sadlly disturbs the existing equilibrium. Except for the taxes that

are sumptuary or regulatory or taxes designed and levied to have a

particular effect on economic activity, it can be said that taxes have

a negative impact even though the expenditures financed by taxation

may be desirable.l

The value added tax is no different than any other tax when

viewed In this perspective, that Is, It is "bad," but when compared to

the alternatives and given the assumption that some type of tax is go-

Ing to have to be levied then the perspective changes. Therefore, It

must be evaluated in relation to the various alternatives available

and with their related effects. Professor Dan Throop Smilth has said

in regard to tax systems that "a tax structure should be appraised from

the standpoint of equity, economic consequences, and simpltcity, and

IThis study, of course, cannot go into the merits or demerits
of the various types of governmental expenditures. Rather thes e ar
taken as given data.

Its bad effects listed under these three criteria which often conflict

wi th each other.,,2

It Is recognized that In practice neither of the ultimate re-

suits of equilibrium (that Is, all forces at the economic system are

In balance) In economics nor equitable distribution of the burden of

taxation may actually be achieved but "the failure to reanz~e such an

ideal product, however, does not dispruve the presence of basic forces

that would produce that result were It not for the presence of restrain-

Ing factors."3 This is analagous to the situation where the forces of

competition are impeded by elements of market control, innobility of

labor and capital, et catera. So also the forces for equity in the tax

burden are often diverted by such considerations of political expedl-

ency, unequal political strength, inadequate knowledge, and the various

other factors that may come into being in a practical situation.

In recognizing this situation, how does the value added tax

fit into the tax structure? The purpose of this chapter is to evaluate

the value added tax from the standpoint of equity, neutrality, and var-

lous other factors. In doing so, an attempt will be made to determine

who would bear the burden of the taK, 1t see whether Of not it is GCO-

nomically neutral, and to try to determine the other economic effects

that may come from the tax. A decision on the relative merits of a

2Dan Throop Smith, "Tax Alternatives for the Next Decade,"
Alitqrnatives 1;o Present Federal Tqxeg (Princeton: Tax Institute of
America, 1964), pp. 3-4.

3oscoe Arant,"'Business Taxation in the Southern States," Ty1
na49.840% XVI (June and July, 1938), 436. Professor Arant, In speak-
Ing of the ideal product, Is referring to an economic system which Is
In equilibrium and also has an equitable distribution of the tax burden.

tax, whether It be the corporate income tax, the value added tax, the

sales tax, or any other type of tax must turn its attention to that

evasive factor--the Incidence of the tax under consideration.

Shifting and incidence

Trying to determine the final incidence of a value added tax

is no easier than for a corporate income tax.l In fact, one writer

has said that "The shifting process involved In the value added tax Is

much less easy to trace than that of a taK whDse impact fall $$Only on

one element, rsuh as the sales tax or the net income tax."5 Further-

more, according to Professor Finnin, shifting of the value added tax

Is particularly complicated "because it combines the features of a not

income tax, a tax on the use of capital, and a tax on payro~ll.'b This

difficulty is further emphasized by Professor Studenski. He stated:

The incidence of a tax on value added cannot be
easily determined, for It Is subjct to a great many
varying influences. inasmuch as the tax would become
a part of the entrepreneur's costs of production, it
would affect his profits and his pricing and production

There are three alternatives available to the entrepreneur In

regard to shifting: (1) the tax may be shifted forward to consumers

4ee Appendlx A below for a discussion relating to the shift-
in~g and incidence of the corporate income tax.

SPeter A. Firmin, The Mighiqen Businqqg Receipts Tax (Ann
Arbor: University of Michigan, 1953), p. 129.

.,&~ p. 126.

7Paul Studenski, "Toward a Theory of Business Taxation," rlur-
P41 of Pol itjcal Economy, XLVI II (October, 1940), 657.

In the form of higher prices; (2) It may be shifted backward to the

other factors of production in the fonn of lower factor prices; or (3)

It may be absorbed by cutting costs through higher efficiency or by

receiving lower profits (or higher losses).

if we view the value added tax as a form of tax on output,

Professor Harry Gunnison Brown appears to have eaeinated the problem

In one sweeping stroke. He recognized the problem of shifting a tax

on output and realized that It could be shifted either forward In the

form of higher prices to the consumers or that it could be shifted

backward to the suppliers of the factors of production in the form of

lower factor prices. After completing his analysis, he came to the

conclusion that it really does not make any difference which direction

a tax of this nature could be shifted because the burden would be iden*

tical in either case. His reasoning In arriving at this conclusion

can be seen in the following quote.

If, then, there is a general tax on output, the
money incomes recalved by laborers, capitalists, and
landowners must all be reduced. Since, of the prices
paid for goods, a part .. Is taken by government,
only the remainder can go as wages, interest, and rent
for the factors of production. The Incidence of a gen-
eral output tax is, then, in practical effect, the saee
as If It raised all prices (as most of the public seems
to suppose It does) without either decreasing or increas-
ing money Incomes. For In either case there is a sub-
traction, proportioned to the tax, from the reel incomes
of wage receivers. Interest receivers, and recipients of
land rent. Whether comeodity prices, reaian the same and
money incomes fall or connedity prices rise and money
incomes remaln unchanged, the distrl ution of the tax
burden would appear to be identical.'

8H. G. Brown, "The incidence of a General Dutput or a General
Sales Tax," Journal of Political Econqurry XLVil (April, 1993), 257. It
should be pointed out that Professor Brown was referring to a full-
employment economy and that the tax under consideration applied to all

If, on the other hand, we view the value added tax as a form

of the retail sales tax, according to Professor Brown, the conclusion

will be the same but reached in a different way. He said, and this is

particularly relevant to the use of a value added tax for producing

state revenues, that:

So far as concerns a general retail sales tax levied
by a single state or by a very few states, our conclu-
sion Is that such a tax would raise retail prices in
such a state or states by approximately the annunt of
the tax. The view of the man In the street that such a
tax raises the prices of goods in general Is, to this
extent, conf Irmed.9

The degree of shifting actually attained would appear to depend

upon market conditions and the rate of the tax. If the tax were levied

when there exists a high level of economic activity and a high level of

employment, shifting could probably be achieved to a high degree. If,

on the other hand, It was levied when economic activity was sluggish

and when there exists a high level of unemployment, the tax probably

could not be shifted and If it could be shifting would tend to accentu-

ate unemployment. The degree of competition that exists in the market

would affect the amount of the tax that could be shifted. If the in-

dustry is highly competitive, It would face a much more difficult task

in shifting than would the Industry that is highly monopolistic. Pro-

fessor Studensk1 has stated this very succinctly. In relation to mar-

ket conditions and structure, he has stated:

Although the general trend of the Incidence of the
tax on "value added' may be such as described, the actual
incidence would most likely vary greatly from Industry to

9E., p. 259.

industry, depending on its nature and the relative
elasticity of supply and d nd and existence of co~pe-
tition or monopoly therein.

Professor Due, however, does not fully agree that the degree of

monopoly power has any significant effect on the possibility of shtft-

Ing the value added tax. In fact, he has said that "It doesn't seem

to me that the degree of concentration has much to do with the extent

of the shifting of the value-edded tax. In unst markets, the tax 1s

going to shift forward anyway, regardless of concentration...11

From the above discussion there are at teest two conclusions

that can be drawn. First, a tax that applies to all business activity

should be easier to shift than one that applies to only a particular

segment of business activity. Therefore, it follows that the value

added tax would be subject to more shifting than the corporate Income

tax since It would (conceptually at least) apply to all businesses

adding value to their product. Second, the lower the rate of tax the

easier It should be to shift the tax. This second conclusion Is based

primarily on the fact that the lower the rate of tax the smaller the

aount that must be added to the price of the product in order to shift

the tax forward. if this is true then the value added tax should be

more easily shifted than the corporate income tax since it would be

levied on a broader bsas and at a lower rate than the corporate income

tax. These conclusions do not necessarly hold, however, If we are

10Studenski, po M ., p. 675.

IlJohn F. Due, "Should the Corporetion income Tax Be Replaced
by the Value Added Taxi" P~roceedinas of the Fifty-~sventh Annual Con-
ference. 1964 (National Tax Associatlor), p. 46

contrasting the value added tax with a retail sales tax. In fact,

Professor Due has said in contrasting the value added tax with a re-

tall sales tax, that ". .. a value-added tax applying at all stages

In production and distribution is basically the same with respect to

final distribution of burden by commodity as a retail sales tax apply-

Ing to all sales of consumer goods. 12

This conclusion appears to be the consensus of opinion of most

tax economists If the retail sales tax does apply to all consumer

goods, that Is, they appear to agree that a sales tax is generally

shifted forward to the consumers of the product and that wh i a the

value added tax probably Is shifted it

.. cannot be passed forward Into consumer prices so
automatically as other sales taxes. What would probably
be shifted Is some sort of weighted-average "value-added"
among firms In an "Industry or In a group of closely
competing industries. This means that some firms can
pass on more than the total amount of their ta, whle~
others must bear part of the tax themserlves.*~

From this discussion of shifting it would appear that a retail

sales tax would be preferred over a value added tax. This appears not

to be the cats, however, due to the fact that the value added tax vnould

be applied to a broader base and therefore would necessitate a smaller

rate to yield the same revenue as would a retalI sales tax unless the

sales tax was all inclusive. Also, regardless of the problems of de-

termining whether or not the tax can be shifted, there seemsi to be an

12John F. Due, Sales Taxation (Urbana: University of illnols
Press, 1957), p. 126.

13M., Bronfenbrenner, "'Second Thoughts on Value-added Taxation,"
Finanzarchiv. XVI, No. 2 (1955), 310.

imrptlcit assumption in the writings on the value added tax that It can

be shifted and this shifting would be forward. Mborover, If we accept

the conclusion that we do not know how the burden of the value added

tax is going to fall and let this Influence us into accepting another

tax rsch as the corporate income tax there is an implicit arssuption

that the incidence of the corporate income tax is known. This is just

not the case; therefore, if we have valid reasons to believe that the

burden resulting (even though we cannot prove It) from the value added

tax is more equitabtle then this is reason enough, at least from the

equity standpoint, to adopt it.

Princilel of Neutrality

Neutrality Is the ultimnate goal of business taxation. While

It Is recognized that business taxes cannot be entirely neutral, they

should be designed so as to interfere as little as possible with the

functioning of the market system, disregarding the intended effects of

sumptuary and regulatory taxes. But, as was pointed out above, taxa-

tion is an economIc phenomnuon and the Introduction of any tax In a

balanced economic system will disturb this system if for no other rea-

son than the introduction of the tax itself. "It is, therefore, Im-

possible to consider taxes as being neutral, unless the term economic

neutrality' of taxes Is reserved to the particular case of a levy of

taxes which, though inevitably modifying the numerical elements of the

economy concerned, rnould not modify the respective relations of these

1 5ee page 56 below for a discussion of the equity of a value
added tax.
$ With this In mind how does the value added tax measure

up to this principle of neutrality?

Generally it appears that writers on the subject believe the

value added tax meets the principle of neutrality better than most

other types of business taxes. Professor Shoup has given it a broad,

sweeping approval. He said:

This is the most economically neutral form of busl-
ness taxation; it does not discriminate against the use
of: labor-saving devices (as does any tax on prof its);
It does not favor machinery over labor (as does a pay-
roll tax); it does not favor the large vertically Inte-
grated concern (as does the turnover tax or gross receipts
tax). It is presumedl to belong to the family P~shift-
able taxes to be paid chief ly by the consumer.

Later Professor Shoup appears to have modified his opinion

somewhat. While he sti ll endorsed the value added tax, he came ra the

conclusion that the income type (see above discussion) ". .. exhibits

the same kind of discrimination in favor of consumption spending and

against saving In a form that yields an Interest return that the usual

type of income tax dooe." 7 HNe also concluded that It Is not natural

with respect to the use of capital versus labor.18 This situation

15Charles Campet, "Quelgues Aspects Economiques de la Taxe
Fran~caise Sur la Valeur Ajoutee," Public Finange, XII, No. I (1957)r

16Cart s. Shoup, "Tax Reform in Japan,"' Proceedinas of the
Fory-spon N~ioni Conferenge, 1949) (Nlational Tax Association,
190) 412.

17Carl 5. Shoup, Theory and background of the Value Added
Tax," Proceedings of the Forty-eighth Annual Conference, 1955 (National
Tax Association, 1956). p. 13.

180bi., p. 18,

exists because of the interest factor arising out of the tax savings

realized from the early deduction of the cost of capital equipment.

Professor Due, while not giving the value added tax the broad

endorsement of Professor Shoup, also favors it over many other taxes.

He says:

Compared to the multiple stage sales taxes, the ad-
vantages of the value-added tax are tremendous. The
discrimination against non-integrated production and
distribution channels is completely eliminated, as well
as the incentive toward further integration, and the
highly uneven burden on various commodities. The only
possible limiltation is the somewhat higher tax rate n~e-
essary, other elements being the smerni9~

However, after wh~at seems to be an overwhelming endorsement,

Professor Due goes on to say that ". .. if a country is able to ad-

minister a retail sales tax without difficulty, very Ilttle is gained

by using the value-added form, and operation of the tax is inevitably

made more compl icated...20 It should be pointed out that this is based

on the assumlption that thesales tax would be on ALL consumer sales,

not just a selected segment.

Integrated vs. Non-integrated Firms

The argument that the discrimination against either integrated

or non-integrated firms is elimilnattd by the value added tax is based

on the fact that the firms pay the tax only on the value added to the

product and it is assumed that all value added carries the same tax

rate. If the firm is highly integrated the value added would be high

190ae, Sales Taxation, pp. 366-367,


and therefore the tax would be high, absolutely. The opposite would

be true for the non-integrated firm.

This can be demonstrated with the following example. Assume

that we have four firms making Identical products. Firm I is verti-

cally integrated and therefore completes the entire product while Firms

e-1, a-2, and a-3 ear not integrated but complete the product in each

of the respective stages that it goes through. The product is completed

in three stages. The final selling price Is $130. There Is a value

added tiax rate of 20 per cent. To allmi nate pyramiding (which wi ll be

taken up later) assume that all transactions are not of tax. Also it

is assumed that the tax Is shifted forward.

The following takes place In Firm 1:

Stage 1 Purchases raw materials for $30 and adds labor
costing $30.
Stage 2 Adds more raw materials costing $15 and more
labor costing $25.
Stage 3 Sells and distributes the product to final con-
sumer for $130.

Firm I will1 have $9 value added tax shi fted to it on purchases of raw

materials from other firms and will Incur a value added tax liability

of $17 on the value It adds to the product. The product will bear a

total value added tax burden of $26.

The following takes place in Firms a-1, a-2, and a-3:

Firm a-1 Purchases raw materials costing $30 and adds
labor cost ng $30 and sells the product to
Firm a-2 for $70.
Firm a-2 Purchases the product from Firm a-t for $70
and adds raw materials costing $15 and labor
costing $25 and sells the product to Firm a-3
for $120.
Firm a-3 Purchases the product from Firm a-2 for $120
and distributes It to final consumer for $130.

Firm a-i willI have value added tax of $6 shifted to it and will Incur

an $81 liability on the value it adds to the product. Firm a-2 will

have $14 of value added tax shifted to It from a-i and $3 shifted to

It on the raw materials it adds and will Incur a $7 value added tax

liability on the value It adds to the product. Firm a-3 will have $24

of value added tax shifted to It from a-2 and will Incur a $2 tax II-

ab iity on the value it adds to the product. The total tax on the

product produced by Firms a-i, a-2, and a-3 will be $26, the same as

the product produced by Firm 1. Therefore no discrimination exists in

favor of vertical Integration.

If, on the other hand, a general turnover tax of the same rate

were levied,21 the product of Firm I would have to bear a tax of $35

made up of )9 on materials purchased and $26 on Its own sales. The

sane product produced by Firms a-1, a-2, and a-3 would bear a tax of

$73. This total Is made up as follows: materials purchased by Firms

a-1 and a-2. $9 ($45 x .20); sales of a-1, $14 ($70 x .20); sales of

a-2, $24 ($120 x .20); and sales of a-3, $26 ($130 x .20). Therefore,

from this extreme example, it can be seen that a turnover tax would

discriminate against the non-integrated firms In favor of Firm I, the

integrated firm.

A single stage sales tax of the same rate would, of course,

produce the same tax as the value added tax but would be levied only

on the final sales price and only on the firm selling to final consumer.

211t is obvious here that a lower rate for the turnover tax
would be required if a given amount of revenue was desired. The sell-
Ing prices of the three firms have again been stated net of tax for

Labor Intrnsive vs. Capital Intensive Firms

It has been argued that the value added tax discriminates

against labor intensive firms in favor of capital intensive firms.

This argument is based on the fact that capital equipment can be de-

ducted from the value added by the firm whereas the purchase of labor

cannot. This appears to be a valid argument if the assumption is that

the tax is not shifted. If it is assumed, however, that the tax is

shifted forward, the labor intensive firm pays a larger sum of tax

than does the capital intensive firm per dollar of sales, but the cap-

ital intensive firm has a larger tax burden shifted forward to it in

the cost of the Items purchased and used.22

The assumption made that 100) per cent of the tax is shifted

forward is probably a rather heroic assumption. Less than 100 per

cent or more than 100 per cent of the tax may be shifted forward. If

tess than 100 per cent is shifted forward then the tax discriminates

against the labor intensive firm and If more than 100 per cent it dis-

criminates against the capital intensive f irms.

This Is demonstrated by the following example. Assume there

are three possibilities that exist for the shifting of the value added

tax: 100 per cent shifting; less than 100 per cent shifting (50 per

cent is used for Illustrative purposes only); and more than 100 per

cent shifting (120 per cent is used for Illustrative purposes only).

There are two f irms: A and B. Sales for each firm amount to $200.

The value added tax rate is 20 per cent. Firm A purchases and uses up

22Due, Sales Taxation, p. 366,

$100 of capital equipment In producing the sales of $200 and firm B

purchases $100 of labor In producing the $200 of sales. (For simplic-

ity, assume that no other factors exist.)

If 100 per cent of the tax is shifted forward on the purchase

of the capt tal equl pment, then FI rm A wi ft have shifted to it $20 on

the purchase of the equipment and will have to pay $20 on the additional

value of $100. Firm B will have to pay $20 on the labor it purchased

since labor Is Included In taxable value added and $20 on the additional

value added. Therefore, the sales of both firms will bear a burden of

$40O and no discrimination exists In favor of either,

If less then 100 per cent of the tax is shifted forward (50 per

cent is assumed) on the purchase of the capital equipment, then Firm A

will have shifted to It only $10 tax on the purchase of the equipment

and will have to pay $20 on the additional value added wIhile the sales

of Firm B must still bear a burden of $40 as calculated above. There*

fore, discrimination exists in favor of the purchase of capital equip-

ment since the sales of Firm A will1 have a $10 smaller tax burden to


If more than 100 per cent of the tax is shifted forward (120

per cent IS assumed) on the purchase of capital equipment, then FirmA

wlill have shifted to It $24 on the purchase of the equipment and will

have to pay $20 on the additional value added while the sales of Firm B

still bear a burden of only $4~0 as calculated above. Therefore, dis-

crimination exists in favor of the use of labor lotrstea of cooltal

since the sales of Firm A will have a $4 larger tax burden to bear.

As was shown earlier, however, the consumption type of value

added tax does in fact tend to discriminate slightly 1in favor of the

capital intensive firms as opposed to the labor intensive firms. This

is due to the Interest factor Involved on the tax savings reallked

from being able to deduct the entire amount of the capital equipment

purchased in the period of purchase rather than over the entire life

of the asset as under the Income type of tax. This can be overcome by

using the Income type and does not serve as an indictment of the value

added tax. Also, this process would be reversed over the life of the

equipment If the consumption type were used due to the firm being un-

able to deduct depreciation during the use of the equipment.

Prof juble vs. Unprqf itable firms

Another argument used In favor of the value added tax In con-

trastlng It to the corporation Income tax is that a value added tax

would and the discrlminadlon against the profitable and efficient firm

In that it would tax al l fi rms, whether prof table or not, if they had

added velue to their products while the corporation income tax would

not. There appears to be an implicit assumption In this argument that

a business fi rm can bear the burden of a tax. This is true only if the

business enterprise is viewed as a separate and distinct entity from

its stockholders, that Is, the enterprise is essentially the same as an

individual. This type of reasoning Is difficult to accept.23 If am

23For a discussion of this point see L. E. Kust, "Apprelsal of
the Corporate Income Tax," Aleravp oPsn FdrlTxp
(Princeton: Tax Institute of America, 1964), pp. 17-31.

tax falls on a business (that is, It is not shifted forward or back*

ward) then it Is the stockholders wrho must bear the ultimate burden

(not the business finn itself ) through lower dividends or through

lower prices for their shares If these shares are disposed of in the

open market. if the opposing view is taken, that is, if the tax is

shifted, then consumers must pay higher prices for the product or fac*

tory owners must receive lower prices. If this shifting exists, then

there is no discrimination against prof Itable f irms.

Professor Slitor strongly believes that the corporate Income

tax discriminates against profitable firms while a value added tax

would not. This can be seen from the following statement:

The value-added tax makes no distinction between
costs and profits. It Is a tax on costs, on the use of
productive resources, as well as on profits. It would
be paid by every firm whichl uses markets and resources,
efficient and inefficient alike, In proportion to such
use. It woul penalize the inefficient for dispropor-
tionate use."

This argument appears to be realistic If It is assumed that

the tax (or at least part of It) Is not shifted. But a basic asum~p-

tion of a value added tax appears to be that it would be shifted. If

this is true, then the unprofitable and inefficient firms cannot bear

part of the burden as It would be shifted and If shifted the firms re-

gardless of whether or not they are efficient or inefficient would not

bear any burden since It cannot be borne at two places. This Is not

to say that partial shifting cannot occur with the unprofitable and

2 ifchard E. Slitor, "The Value-Added Tax as an Alternative to
Corporate income Tax," ]gax poi XXX (October-November, 1963), 6.

inefficient firm bearing part of the burden. But to hold the tax Is

shifted in full and then to argue that the unprofitable firms bear

part of the burden Is untenable.

Also, there seems to be another assumption made here. The

proponents of this argument appear to be assuming that the profitable

flrms are always the efficient firms, that Is, profitability equals

efficiency. In fact, this is so stated by Professor Slitor. He says

that by Its nature, the corporate tax is pald only by the profitable

and therefore efficient firm. It costs the marginal producer little

or nothing.,,25 This may or may not be true. That is, a firm may be

Inefficient and still be profitable particularly if the firm has a de*

green ~of monopolistic powers that It can use In the market or if there

Is a high level of economic activity. But It must be noted that,

cateris oaribus, the more efficient a particular firm Is the more prof-

Itable it would be in a given situation. A firm may also be efficient

and unprofitable (granted thls may be the exceptional case, but it can

happen) depending upon the level of economic activity and the degree

of competition In the market. But here again, ceteris paribus, the

more efficient a particular firm Is in a particular situation the

smaller would be its loss. To say, however, that all unprofitable

firms are inefficient Is bordering on the absurd Just as it Is to say

that all profitable firms are efficient. As an Illustration, look at

the same firms operating in the 1920's and 19301s. To carry this argu-

ment to its logical conclusion one would have to conclude that the


firms that were making a prof it In the 1920's suddenly became Inef fi-

clent as most firms suffered losses In the early thirties. This would

be a rather unrealistic conclusion, In f act, these firms may have

been more efficient In the 1930's than they were in the 1920's due to

this squeeze on profits. The loss of profits was generally not due to

a decrease in of ficiency but to a slow-down In economic activity,

it is further argued that a tax assessed wholly on not income

is paid only by those firms that operate at an accounting not profit

and this makes them di rectly subsidize their inefficient competitors

all of whom along with their employees vote for the various forms of

governmental expenditures.26 Moreover. If the tax is shifted by the

more prof itable firms It raises a price umbretta over firms that ear

inefficient and are using obsolete and outmoded equipment. Therefore,

resources are left In the hands of Individuals who are least able to

utilize them which in turn slows down economic growth and expalnsion.27

The value added tax may pressure the firm into becoming moDre

efficient, particularly In relation to the corporate income tax. This

Is due to the value added tax making no distinction between certain

costs and profits. For example, under the corporate income tax a firm

may have to decide whether or not to increase an executive's salary by,

say, $10,000. Under the corporate imncae tax, the after tax profit

for the firm will decrease by approximately $5,000 as the other $5,000

2 ~adsworth W. Mount, "A Re-examination of Taxation Fundamen-
tals," Financia l Mananment Series No, 67 (New York: American Manage-
ment Association, 1941), p. 10.

27Slitor, Iw st

serves as a reduction in Income taxes. But under the value added tax

the increase In salary of $10,000 would still be taxable since it con-

stitutes value added. On the other hand, a firm may, by certain moves,

be able to decrease cost by $10,000. Under the corporate income tax

the after tax profits would be increased by approximately $5,000.

Under the value added tax, however, the $10,000 decrease in costs would

be all profits since it would not change the value added of the firm

unless it was a reduction of costs purchased from outside firms, that

is, the purchase of materials or other costs included in value added

by the other firms. Therefore, the value added tax liability would

remain unchanged.

Furthermore, the loss firm and/or the firm that makes zero

profits must be able to shift the value added tax since to them the

tax Is a cost that must be recovered unless they are to go out of

business. Of course, If they are so 'inefficient" so as to be forced

out of business then the tax has probably fulfilled one of its goals--

the elimination of inefficient use of resources. Moreover, by Includ-

Ing in its base both net Income and all other factors of value added,

the value added tax excuses no one and assesses each enterprise for

what may be thought to be its proportionate share of the cost of the

government .28

28D. Rl. Huggett (ed.), "Tax Review," Cangdian Chartered Account-
gat, LXXXII (March, 1963), 222.

Fomes of Business Oraanization

The value added tax would be neutral as to the fone of business

organization that an Individual enterprise would take. The corporate

income tax discriminates In favor of the individual proprietorship or

the partnership form of business organization since neither of these

forms are subject to this tax. (This discrimination Is, of course,

partially offset by the effect of the progressive personal income tax

and the various preferential tax provisions for dividends and capital

gains.)29 This discrimination would end under the value added tax

since all businesses would be taxed on the value they added to the

product and at the same rate. The retail sales tax does not have this

discrimination factor built into It as It taxes all businesses on their

sales regardless of the form of organization the particular business

takes .

If the value added tax were adopted, organizers of businesses

would not have to expend tim eand energy in selecting the "correct"

form of organization that would minimize the tax burden; rather, they

could expand this timne and energy Into increasing the efficiency and

output of the business enterprise.

Reqressi vity Arauentn

The classic argument used against the value added tax as a

substitute for the supposedly progressive corporate income tax is that

2 For a detailed discussion on this point see Daniel H. Holland,
Dvdd Under the Incappy Tax (Princeton: National Bureau of Economic
Research, 192)

it would involve the replacement of a progressive tax on corporations

and their shareholders with a tax that is regressive in nature.30 This

argument, however, cannot be used against the value added tax In com-

perison to a sales tax since both are considered to be of the regres-

sive nature.31

If it can be assumed that the value added tax is shifted and

the corporate income tax is absorbed by the corporations and their

stockholders, then this is a clear indictment of the value addudi tax

(tf progressivity is a criterion). It can be seen fran the preceding

discussion that this assumption cannot be accepted without questions;

thus, the argument must be questioned. If it is assumed that both are

shifted forward Ilke a sales tax then the Issue ". .. Is not regres-

sivity but a choice between a more uniform and rational sales tax and

an erratic and economically hannful sales tax, the amount of which

would va.-y la relation to consumer price, depending on the corporate

profit margin of the particular Industry."32

if progressivity is to be used as a criterion, there is the

possibility of Introducing it into the rates of the value added tax as

305titor, MD l., p. 8.

3 For enpirical studies which support the regressivity hypoth-
esis of the soale tax see i rvlng J. Goffman, The Burdqn of Cgrjadian
Taxto (Canadian Tax Foundation, 1962), p. 18; David G. Davies, "An
Empi rical Test of Sales-Tax Regressivity," Journal of Politicgl Econ-
AmI. LXVit (Februaryt 1959), 72-78; and Gerhard N. Rostuald, "Distribu-
tion of Property, RetalI Sales. and Personal incomea Tax Burdens In
Californiar: An Empirical Analysis of Inequity in Taxation." NastenaL
Tax Journal. XIX (March, 1966). See also pages 130-133 below.

32511tor, op. cit., p. 7.

has been done to a certain degree In France. This, however, appears

to be a complicating factor that should be avoided. If possible. If

progression is desired in the tax system It could be brought in through

the use of other types of taxes rather than complicating the value

added tax. (Progressivity in the tax structure Is generally not a

problem at the state level, however, as it Is usually left to the fed-

oral government.)

Burden on Ngw Businessaq

Even though the validity of the above criticism rests upon

what assumption is made in regard to shifting, there appears to be one

serious weakness in the value added tax. It appears as If the value

added tax would tend to discourage new firms since it would raise the

risk of whether or not they would be profitable. This Is not true

under the corporate Income tax since it spares all businesses in lean

years, that Is, no Income no tax liability.

This can be illustrated by the use of a simple eamaple. As-

sume we have a new firm. There is a value added tax which applies to

all value added and it Is of the income type using the subtraction

method of calculating value added. it is assumed that all materials

purchased are used to avoid the problem of Inventory accumulation.

The firm has capital equipment that is subject to depreciation of

$20,000 In period I and $30,000 in period 2 and subsequent periods

(calculated by using the straight line method of depreciation). For

purposes of illustration assume that the value added tax rate Is 2 per

cent, and, alternatively, the corporate income tax rate Is 10.6 per

cent (these are the rates required and used to yield a certain amount

of revenue in Chapter VII In the proposal for Florida). The compara-

tive income statements found in Table 2 incorporating the above assump-

trons wlli show how the value added tax increases the risks of the

early years of the life of a business. (The firm here is assumed to

have become profitable in Its second period of operation. This prob*

ably would not occur in practice.)

it can be seen from these incme statements that if a value

added tax is In existence the firm wt1 1I ncur a llabii~ty of $600 on

its value added in period I even though it has an accounting loss of

$10,.000 and a liability of $1,400 In period 2 with an accounting net

Income of only $5,000 whereas if the corporate Income tax were used

there would be no tax liability in either periods I or 2 and only

$1.590 In period 3. Moreover, It is not untl period 5 that the tax

liability under the corporate income tax will in the aggregate be as

large as the tax Ilability under the value added tax. This obstacle

could be overcame through the use of certain administrative policies

relating to newr businesses, however, and should not be used to condemn

an otherwise sound tax.

The admilnistrative method of overcoming this obstacle would

have to be designed very carefully, however, to avoid the serious

problem of permitting an old business to change "hands" and became a

new business in order to take advantage of whatever policy was decided

upon. In other words, some strict guidelines would have to be drawn

up as to what constitutes the beginning of a new business and what

constitutes an old business that has changed hands.

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Avoidance of "Cascadd' Elements and Pvranidina

The value added tax would be relatively free from the pyramid-

ing effects found in many taxes such as the turnover tax or the manmu*

facturers' excise tax. This is so because under it each business en-

terprise Is taxed on its actual production, that is, the actual value

added to i ts product based "on the relative use made by it of the market

and other facilities maintained by organized society."3f

Generally speaking, pyraniding results from the application of

markups by successive processors or distributors to their costs, include*

Ing the taK paid and shifted forward by the earlier stages of produce*

tion. This application of the markup to the amount of the tax shifted

as well as to the costs Increases the final price by more than the ag-

gregate enount of the tax, the increase representing In a sense profit

or Interest on the additional working capital reqluirements imposed by

the tax. The value added tax Is not free from this kind of pyramiding.

Neither is any tax Imposed at the earlier stages of manufacture, In-

cluding a shifted corporate not Income tax."34

An example of pyraniding would be a 2 per cent tax levied on

flour sold to a baker and a 2 per cent tax levied on the bread sold to

the grocer and a 2 per cent tax levied on the bread sold to the final

consumer without first deducting the tax at each level. The absolute

amount of this pyrantding would depend upon the number of times the

335tudenski, oa. g., p. 648.

Y Richard E. Slitor, The Value-Added Tax as an Alternative to
Corporate income Tax," Altenmative~ toPresent Federal Taxes (Princeton:
Tax Institute of America, 1964), pp. 37-38.

goods under consideration "turned over" from its beginning until it

reaches the final consumer. This pyramiding process tends to favor the

large integrated firms which decrease the number of times that the goods

must be "turned over"' and against the small specialized firms that are

limited to only a small number of steps in the production process.35

While the value added tax would not be completely free of pyra-

mlding the costs that are purchased from outside the firms are deducted

at their total purchase price and this would minimize the effects. Also

under the value added tax the government would be treated as an agent

of production as are labor, management, and capital, and it would also

share as they do. The government would, however, be guaranteed a stated

percentage of the value added by a firm without having to go directly

Into the market to sell its services, that is, under the value added

tax, it would be assumed that every business enterprise would make use

of the services furnished by the governmernt--the benefit principle.

How does the value added tax measure up to the three major dis-

tribution principles of taxation; (1) erual treatment of ecuals; (2)

abil1i ty-to-pay; and (3) the benef it principle?

If all value added is taxed at an coual rate, there Is little

doubt but that a value added tax would be horizontally cnuitable. Hor-

izontal e: uity Is defined as "people in e ual positions should be

35Roscoe Arant, "The Place of Business Taxation in the Revenue
Syste-ms of the States," Taxes--The Tax Magazine, XV (April, 1937), 197.

treated equally."3 In fact, It would tend to treat everyone equally,

regardless of whether or not he Is equal since all value added would

carry the rsam amount of tax.

A tax of equal rates on all value added would not follow the

ability-to-pay approach, unless ability-to-pay can be measured by con-

sumption expenditures, since It would tax both the rich and the poor

at the same rates. If, however, as In France the rates are made "pro-

gressive" by taxing so-called luxuries at a higher rate than necerss-

ties, It does follow, to a certain extent, the ability-to-pay approach

The problem then arises as to what constitutes necessities and

what constitutes luxuries. This would be a very difficult problem to

resolve, except in rare cases, although there may appear to be agree-

mlent among the individuals making up certain segments of the popular*

tion. But what is a luxury to one segment of the population may actu-

ally be a necessity to another segment. For example, expensive chara

pagne would be a necessity to an individual in top management but a

luxury to a department store clerk. introducing progressive rates

Into the value added tax would appear to be an unnecessary complicat-

ing factor as other taxes could be used if progression Is required.

On the surface it appears that the value added tax meets all

the requirements of the benefit principle in that each firm is taxed

according to the use it makes of the nation's resources or factors of

production. For the part of the tax that Is not shifted (If any) this

3bRichard A. Musgrave. The Theory of Public Finance (New York:
Mc~jraw-Mll Dook Company, Inc., 1959). P. 160.

Is probably true, but for the part that Is shifted it may or may not

be true. Musgrave and Richman are of the opinion that for state taxa-

tion, if it is held that business taxes should be of the benefit type,

that value added Is a better Index of benefit received than profits

are. Thls benefit principle will be accomplished by the value added

Income type and not by the profits tax unless there Is complete short

run shifting of the profits, tax.3 Their reasoning can be seen from

the following quote:

If It Is held that state business taxes should be of
the benefit type, there Is good reason behind the propo*
sition that value added is a better Index of benefits re-
ceived than profits are. Also, If the state business tax
1s, to rest on a benefit basis, the tax should be imposed
In such a way that the burden Is passed on to the bene-
ficiaries of the public services In question. This is ac*
complished by imposing a tax which will Increase the cost
of operation, Just as the public service has reduced It.
This will be accomplished by VTI but, unless there is com-
piete short-run shifting, not by PT. Provided that
"benef[ t" and "tax" shifting will be similar, ~neutrall-
zation Is then achieved, whatever the direction of the
shift. Assuming that public services tend to reduce all
costs equally, this result is accomplished by VTI; and to
the extent that particular (e.g., transport) costs are
reduced, particular cost taxes (e.g., on gasoline) are
In order. To the extent that the beneficiaries of public
services are out of state (be it owners of capital or
consumers of the product) It is only proper that the tax
burden be "oxporte S" corresponding to the export of
benefits received.

All of the above discussion on equity has one serious drawback

it considers only the tax side and says nothing of the expenditure

f'lRichard A. Musgrave and Peggy B, Richman, "Alloc~ation As-
pects, Domestic and international," The Role of Direct and Indiripat
Tqxes In the Federal Revenue System, National Bureau of Economic Re-
search and the ereaki ngs i nst ituti on (Pri nceton: Princeton University
Press, 1964), p. 98.

31bid The symbols VTI designate the value added tax, income
type and PT, the corporate profi ts tax.

side of the govenmnent. A full evaluation of equity quite obviously

requires an evaluation of the expendi tures side of govermenut.3

In addition to the socio-economic problems discussed above,

there are several other significant problems (although of lesser im-

portance) such as the treatment of capital expenditures and deprecia-

tion, capital gains, et ceters, which must be solved under a value

added tax. These problems are discussed in Appendix B of this study.


The general assumption of the proponents of the value added

tax is that It Is of the family of shiftable taxes. The errent of

shifting, however, depends upon many factors, such as the tax rate,

the degree of competition or monopoly in the market, the lovel of eco-

nomic activity, et cetera. Trying to determine the final Incidence is

as di fficult, If not more so, than with the corporate Income tax and

no agreement hlas been reached on this polnt to date.

Although no tax is completely neutreI, It appears that the

value added tax approaches neutrality better than most of the other

forms of business taxes except, perhaps, for a retail l sales tax on

total consumer sales. The value added tax does not discrlainate against

the non-integrated firm In relation to the vertically Integrated firm.

The income type of tax is neutral as to capital and labor, assuming

that the tax is shifted, but the consumption type of tax discrlainates

In favor of the capital intensive firms due to the Interest factor

3 ~his type of evaluation Is beyond the scope of this paper,
but the above discussion of equity should be considered with this tlm-
itation in mind.

realized on the tax savings in the early life of the equipment. It

does not discriminate against the profitable firms as does the corpo*

rate income tax. No definite conclusion can be reached here, however,

because of the inability to determine the actual degree of shifting

achieved under either the value added tZK or under the corporate in*

come tax.

The value added tax would not favor one form of business or*

ganization aver another as does the corporate Income tax sines It would

tax all types of business for value added on production at the same

rate, It appears that the value added tax is regressive although no

clear-cut indictment can be drawn and it can be made progressive by

using differentiated rates If desi red. It can be held that the value

added tax has one serious weakness in that It would tend to discourage

new firmrs etering the market since i t would increase the risk by add-

Ing to the cost of their product. This can be e~liminated through ad*

ministrative policies, however, and should not be used as an indictment

of an othenrwse sound tax.

Probably one of the strongest points for the value added tax Is

that It eliminates the "cascade" elements inherent In the various types

of turnover and excuse teaes. very I~ttle can be said as to whether

the tax would be equitable or not since expenditures made from the

revenue obtained are not considered. To determine equity one must have

some knowledge of both expenditures and revenues. The requirement for

horizontal equity is, however, apparently fulfilled. That is, under a

value added tax people in equal positions would be treated equrally.




As was mentioned earlier, there have been very few practical

applications of the value added tax--the French and Michigan taxes be-

ing the onty significant cases of current usage. However, the Euro-

pean Coal and Steel Community has adopted the tax as the sole source

of its revenues and it has been proposed (In 1963) for adoption by

Germany in 1966.2 Japan, the other country for wrhich the tax was

strongly proposed, finally decided In 1954 that it did not want to emn-

ploy the tax. There are several other countries such as Sweden that

are at present seriously considering the adoption of the tax. The

following is a brief description of the tax in practice or as it has

been proposed. Only the Japanese, French, and Michigan taKOs wfitl be


The discussion of these taxes is not supposed to be exhaustive;

rather, It is designed to give a clear understanding of the value added

tax as It has been proposed or actually applied In a dynamic economy.

The Michigan tax will be subject to more analysis since it is levied

Martin Norr, "Sales Taxes in Europe and Canada," eo f
the 1962 Conference (Canadian Tax Foundation, 1963). p. 244.

2Maurice E. Peloubet, "European Experience with Value-Added
Taxation," Tax Policy, XXX (October-November, 1963), 12. To date this
still has not taken place in Germany.

In a situation that, at least on the surface, is similar to that found

In the state of Florida. That is, both states are memsbers of the same

federal system. Otherwilse their economies are very dissimilar.

The Jqpanese Value Added Tax

Coming out of World War it in 1945, Japan found itself with a

war-torn economy in which much of the productive capacity had been

completely destroyed or heavily damaged. Also, the war had been fi-

nanced largely by creating new money through borrowing from its bank-

Ing system. This new money was created in the form of bank notes or

bank deposits. Increases In prices had been prevented by direct con-

trols such as rationing, allocation, price controls, and similar meas-

ures.f With these conditions present at the time of surrender in 1945,

Inflation burst forth. Very little effort appears to have been made

by the occupation forces to control the domestic economic policy and

the inflation continued, although, through a currency change, it was

checked slightly in 1946. This was only a pause, however, and as a

result of the easy borrowing and credit policy followed by the govern-

ment,, by 1948 the price rise had reached a level that was about 200

times that of the pre-war level.4

By late 1948 and early 1949 through the aid of the Young and

Dodge Stabilization Missions, the inflation was controlled and by May,

1949, the price rise had been stopped. Prices remained relatively

$Carl S. Shoup, "Tax Reform In Japan," Proscedinqs of the
Forty-second Nationqal Conference, 1 49 (National Tax Association, 1950)

stable for the remainder of 1949. Thus, It appeared that price sta-

bility was assured enough to justify the planning of a tax refonn.

This being the case the Supreme Commander for the Allied Powers (SCAP),

General MacArthur, Invited Professor Shoup to assemble a tax mission

to study the situation In Japan and make reconasndations.5

The Shoup Mission made recommendations for a complete overhaul

of the Japanese tax system. In fact, the members believed the recon-

mendations, if carried out within a few years as proposed, would give

Japan the "best tax system in the world."6 What they recmeanded was

complete tax system in which all recomnendations were interconnected

with each other and a change In any portlan of the proposed system

would cause the remaining segments to become unbalanced and require

complex adjustments or complete abandonment. Only the value added tax

(Fuka-kac~hi-zel) Is of Interest to us here. It was proposed as the

principle source of revenue for the prefectures (governmental units

approximately the same as our states) and they were to recel ve the

5The Comislsion consisted of Professor Cart S. Shoup, Profes-
sor of Economlcs, Columbia University; Dean Howard R. Bowan of the
College of Camnerce and Business Adminisrtration, Universlty of Illinois;
Professor Jerome B. Cohen, College of the Clty of New York; Mr. Rolland
F. Hatfield, Director of Tax Research, Department of Taxation, State of
Minnesota; Pmofessor Stanley S. Surrey, School of Jurisprudence, Uni-
versi ty of Cal ifornia; Professor Wi lliam Vickrey, Faculty of Political
Science, Columbia University; and Professor W Illiam C. Warren, School
of Law, Columble University. The full report is published In four
volumes In both Japanese and English and is entitled Shoup Mission,
Report on Japanese Taxation (Tokyo; General Headquarters, Supreme Comr-
mander of the Allied Powers, 1949). Volume II, particularly pages
197-204, deals wl th the value added tax.

entire yield from the tax.7 it was proposed as a replacement of the

local business incme tax (1.9y.2-Al.l) and the national transactions

tax (torihiki-daka-zet).

The original version of the value added tax bill (S1Ill for

Local Tax Reform) was presented to the Diet in the spring of 1950 but

was rejected. It was presented again to a special session of the Oiet

In August of the same year and was passed but the enforcement date of

the tax was postponed until January 1, 1952.9

The first version of the bill met with same opposition and was

revised slightly along the lines recommended by the second Shoup Mis-

ston)D but the date of enforcement was postponed until 1953. In 1953

It was again revised and the date of enforcement was set for Nay, 1954.

at which time It was officially repealed by the Diet.

P{*oy~lgins of the Japanese V41ue Added Tax
The final value added tax bill as it was presented to the Diet

contained many details that were not covered in the Shoup Mission re-

port. The tax was to be Imposed upon persons engaged in any of three

categories of business. The blill read as follows: "The valluel added

81M. Bronfanbrenner, "The Japanese Valueddded Sales Tax," $1-
tjanal Tax JournaL, III (D~eember, 1950), 299.

9H1anya Ito, "The Valuer-Added Tax In Japan," The Annals of the
Hitotsubashi Academy. i, No. 1 (October, 1950). 56.

10lotokazu Kimura, "An Unrealized Plan: The Value*Added Tax
In Japan," The Annals of hi totsubashi Academy, V I II No. 2 (Apr il,
1958), 118-119.

taxc shall be imposed, for value added of the business of the first

through third categories, with the amunt of value added as the taxa-

ble bass, by the Do, Fu or prefecture where an office or place of

work Is located, on the persons who operate such business...11h

three categories of businesses are as follows: (1) sales and rentals

of goods and certain services such as warehousing; (2) Ilvestock bread-

Ing and fisheries; and (3) the professions and certain services such

as newspapers excluded from the first category. Agriculture and the

non-profit seeking activities of an educational, charitable, and re-

ilglous nature were exempted as were firms engaged in the property

rental business)2L Also exempted were forestry and mining and busi-

nesses conducted by arny level of governmental, such as the Japanese Na-

tional Rallways, the Japan Broadcasting Company, and various public

banks. M~ost of the exemptions were of the traditional character found

under most any type of tax system. There was one exception to this,

however, and that was mining. There appears to be no rational explana*

tion for the exemption of mining and it is even more purzatng In view

of the fact that quarrying was to have been taxed.l The only other

major exemption was the exemption of businesses with gross receipts of

11Clara K., Sullivan, The Tax on Value Added (New York: Colum-
bla University Press, 1965), p. 131. For an outline of the tax as it
was passed see Appendix C below.

12,th., pp. 131-132.

13)hLd., p. 133.

less than Y90,000 ($250 at the official exchange rate at that time).u4

This was made for the sake of admilnistrative sim~plicity.

The standard rates for the tax were set at 4 per cent for reg*

ular business activities and 3 per cent for the professions, stock-

breeding, and fisherles.l The prefectures were not required to use

these standard rates but could go as high as 8 per cent on general

businesses and 6 per cent on the professions, et cetera. If they so

desired, however, the prefectures could reduce these rates to zero.16

It was expected that after twro years the prefectures would be allowed

to impose whatever rates they thought necessary to yield the desired

level of revenue. The second Shoup nission recmmended that these

differential rates be eliminated, but this reconnendatilon was never

incorporated Into the tax bill.

In the original version of the value added tax bill, the taK

was designed to be of the consumption type with subtraction being used

as the method for calculating the value added. The value added was to

be obtained by deducting from the total amount of the sales all pur-

chases from, outside fins including capital eqluipment expenditures and

inventory accumulations. Sales, on the other hand, were to include

the sale of capital equipment and any decreases in Inventory. There

were to be no deductions for depreciation allowed on capital equipment

In existence at the time the tax was to became effective. Outlays in

14renfenbrennerl oo l., p. 307.

15Kimrure, lo ct

ranfanbrenner, oD M ., p. 308.

excess of value added were permitted to be carried forward for a period

of five years.

According to Professor Bronfanbrenner, who served as a tax

economist in Tokyo during the 1949-50 academic year, there were three

reasons for the above method and type of tax being selected. They

were as follows: (1) to encourage new and expanding firms by allowing

complete deduction of capital outlays; (2) to provide simplicity in

the computation of the tax base; and (3) to attempt to stabili ze the

revenue since capital equlipment purchases would increase In periods of

high economic activity thereby reducing value added and decrease in

periods of low economic activity thereby Increasing value added.17
The dlsallowance of a depreciation deduction on capital equip-

ment In existence at the time the tax was to be Implemented was Inrae-

diately attacked by both businessmen and members of the academic circle.

Professor Ito, a noted Japanese economist, claimed that the discriml-

nation against existing investment was particularly beneficial to large

firms and injurious to the small and average sized firms and would ac-

celerate the downfall of these enterprises which, he believed, were at

that time the backbone of the Japanese economy.l

Professor Ito recommnanded either one of two solutions to avoid

thi s discrimination: (I) the total value of the assets owne~d at the

171311,1. p. 304.

181to, na....rit., p. 50. Professor Ito Is unclear as to ex-
actly what Factors he bases this conclusion on. Apparently, however,
the reason was that most of the small and average sized firms were
labor Intensive to a greater extent than were the larger firms and he
believed the tax would dlscriminate against labor Intensive fIrms.

time the bill was to be put in force should be computed and this amunt

deducted from the value added of the flrm and any sales of these as-

sets Included in the value added of the fine at the time of sale; or

(2) the receipts from the sale of any assets ownd at the time the law

was to gD into effect would not be included in taxable receipts.l

Professor Bronfanbrenner, on the other hand, reconnended simply that

an allowance for depreciation be permitted on the assets owned at the

time of Implementation of the tax even though it might complicated the

law sonmehat.20 When the second Shoup Mission returned to Japan it

also reconsended this allowance of a depreciation deduction on assets

owned prior to the enactment date of the law.21 Professor Sullivan

believes that none of these solutions actually met the problan of the

small firms that were in no position to expand. She maintained, unre-

over, that this problem is Inherent In the consumption type of value

added tax.22

The subtraction method for calculating the value added was also

attacked. The criticism came primarily from the large corporations and

the Japanese accounting profession. The basis for these criticisms,

according to Professor Ito, was that while it was argued by the propo*

nents of the tax that It would be simple those that complained said

that "they would have to keep special books and maintain a special

9., P. 58.

208ronfanbronner, !O, M .

215ullivan, gI l., p. 1)6.


accounting system for computing the value-added amount as the object

of the tax, which would involve a tremendous amount of work and trou-

ble.n23 Moreover, If the addition method were to have been used those

companies could have relied on the calculation of the not profits used

In the calculation of the corporate income tax liability and that it

would be more simple and convenient to adopt a system that would permit

the data already collected to be used.24 It is difficult to clearly

see the rationale behind this argument since if the data for the addi-

tion method are evallable it Is a simple matter to convert these data

for use with the subtraction method. However, the critics won and the

addition method was incorporated on the recommendation of the second

Shoup Mission as an alternative to using the subtraction method Into

the revised version of the value added tax bill1.25

The Shoup Mission recommended the value added tax with the

idea in mind that It would be shifted forward to the ultimate consumer.

This can be seen from the following quote from the second Shoup Mis-

sion report.

A common compilant is that the value-edded tax, not
being restricted to profits, will bear unfairly on those
firms with a large labor element. But this complaint
seems to assume that the value**added tax is supposed to
be borne out of profits, Ilks the present enterprise tax.
Instead, the value-added taK is supposed to be passed on
to purchasers In higher prices. it is a type of sales taK.26

231to, n. l., p. 50.

25Kimura, oD t., p. 130.

26Quoting from Sulilvan, o~ t., p. 1142.

This appears to have been one of the big factors that caused the tax

to be finally abandoned as will be shown below.

Factors Contributina to thereceal of
thp Value Added Tax

There were many factors contributing to the repeal of the value

added tax before it could be put Into practice In Japan. These have

been covered In detail elsewhere;27 therefore, no attempt will be made

to give an exhaustive discussion here, but the more important of these

factors wlli be discussed. These factors should be considered In re-

lation to the above discussion of the various provisions included in

the taK bill.

The tax proposal labored under a severe disadvantage In that

the taxpayers In general and the wealthy taxpayers in particutor had

expected to receive a large reduction in the burden of taxation that

they had to bear. This proved not to be the case and furthermore it

was anticipated that the tax would brf ng about a sharp change In the

allocation of the burden. Those that would be particularly hard hit

(generally the more wealthy taxpayers) were the ones who were the most

If there was one phrase in the proposal that influenced the

repeal of the tax more than any other, it was probably the stataemeit

contained !n the report that "It does not discriminate against the use of

27See for instance Kim~ura, lo. M and M. Bronfanbrenner and
Kitchiro Kogiku, "The Aftermath of the Shoup Tax Reformn. Perts I and
II," Natlygl Ta8x Journgl, X (September and December, 1957), 236-254.

2 1lmure, on l., pp. I16 ff.

capital, especially in the form of labor-saving machines."29 This

statement was Interpreted by the Japanese labor and left-wing movements

to mean that the tax would discriminate against labor intensive firms

In favor of capital Intensive firms, because payrolls comprised a major

portion of the value added of many enterprises. Due to the fact that

the consumption type had been selected, there would have been some dis-

crimination against the labor intensive firms. Whlie Professor Bron-

fenbrenner agreed with this, he believed that the effects arising from

this had been largely exaggerated since at least part of the conces-

sion to capital was offset by the new property tax that was applied to

land and depreciable assets and due to the fact that the tar. was also

imposed upon capital goods which he believed would cause an Increase

in the price of the capital goods.30

Another fear that was expressed by businessmen wajrthat they

could not shift the tax forward as had been proposed. This fear was

aggravated by the slow-down in economic activity that had occurred Just

prior to the proposal of the tax. This forward shifting was also Im-

peded by the fact that there still remained in effect many price con-

trols and the businessmen did not trust the government enough to accept

the promise that the necessary adjustments would be permitted In the

prices of the commodlties subject to price controls.31

29Shoup Mission, gg,,_ght., p. 203.

3 M1. Bronfenbrenner, "The Japanese Value-Added Sales Tax," Pg-
tional Tax Journal, Ill (Decemnber, 1950), 311-312.

31Sullivan, op M ., p. 143.

The underlying distrust that the Japanese have In local govern-

ment officials (in any form of local government) and the general ineK*

perience and/or Incompetence of the tax of ficials also proved to be a

strong factor working agatast the laplementation of the value added

taK. It wa$ alSo expected that the underdeveloped prefectures would

levy thi s tax at Its maximum rate while somne of the more developed

prefectures would use a lower rate thereby placing on unequal burden

on those fnms doing business in the undeveloped prefectures.32

In conclusion it can be said that the general philosophy whi ch

prevailed in Japan during the period in which the value added tax was

under discussion was not conducive to the application of an untried

tax drawn up by representatives of the occupation forces. Therefore,

under the pressures from all concerned the Japanese Diet officially

abandoned the value added tax in 1954.

The French Valug Added Tgx

hilstortgal Background

To have an understanding of the French Value added tax (la t

2ur to valour ajougee) one must look back to see how the French tax

system has evolved into wrhat It is today. France has been the leader

for many years In the user of consumption type taxes on both a national

and local scale. This use becam very substantial after World War 133

32Ktmura, oo g ., p. 123.

$$According to Professor Due. one of the first sales taxes in
the world was imposed in France by Phillilpe )e Bel In the thirteenth
century. Another was proposed In 187) but was rejected In favor of a
stamp tax. In 1917 this stamp tax was changed to a sales tax and

and logically evolved into the use of the value added tax which was

officially adopted in 1954.

In the early twenties the revenue situation in France became

so acute that an additional major source of taxation was needed.

Therefore, the government finally decided upon a transactions tax that

applied to all stages of production, and, with some minor exceptions,

to all products. The yield was somewhat disappointing at first but In*

creased as evasion was detected and the administrative system was Im-

proved. This yield was further Improved by the Introduction of the

frat system which overcame much of the opposition to the tax by
the small retail fers.

There were minor changes made In the tax In 1925 and 1926 with

the introduction of a single stage tax (18 taxe urnque) on certain com-

modities such as coalpmeat, some either food products, and fertilizer.

The rates of this tax ranged from 2.5 to 12 per cent.35 After these

minor changes in 1925 and 1926, with the exception of increasing the

number of items subject to the single stage tax, the tax system In

extended to all retail sales. John F. Due, Sales Taxation (Urbana:
Uni versi ty of Illi noi s Press, 1957), p. 115.

54i)ld. The If.Afitg system is a system whereby the tax Ila-
bility of small retailers is set by bargaining (using previous years
sales figures as a basis for the estimates) between the tax officials
and Individuals involved. Under this system the retailer is not re-
quired to keep a detailed set of books and does not have to submit to
Inspection by tax agents, which is an Important consideration ln France
The use of this system leads to a rather arbitrary burden on the tax-
payer and to various inequities In the tax system. Even though this
1s true the small retailer prefers it to the inspection by the tax

351b1d,4. p. 117.

France reaiarned basi cally unchanged until the thi rtieas. But by the

early thirties, however, it had become so complicated and the discrim-

Instion it provided In favor of the integrated firms led to the need

for a major reform.fb

In 1936, through a general refona which became effective De-

comber 31, 1936, the production tax (taxe a la Droduction) consisting

"of a manufacturers' single-stage tax Imposed under the destination

principle at the rate of 6.38 per cent on sales of commodities, sup-

plementedd by an independent tax on services of 2.04t per cent due wrhen-

ever the services were rendered In France,"37 was introduced as the

basic tax In France. Artisans, who were exempt under the transactions

tax, were made subject to the services tax but were permitted to use

the f~oqrfar system. The rates of the production tax were gradually

Increased and the pressure for additional revenues with the coming of

World War II caused the government In 1939 to re-esrtablish the trans-

actions tax which had been eliminated in 1936 at a rate of 1 per cent

on almost all products. Moreover, the revenue needs of the local gov-

ernmental units also increased and a local sales tax which was col-

lected by the national government was passed. This tax was levied on

retai l sales only but eventually It was extended to all sales except

those made by producers.38 This system with a few modifications and

36Clara K. Sullivan, The Tqx on Vglue Added (New Yorkt: Colum-
bia University Press, 1965), p. I16.

37M~., p. 67.

Due,, ooMcl., p. 119.

some special excises on certain products such as beer, mineral water,

vinegar, vanilla, and playing cards prevailed through the World War II

period and until 1948. Under the production tax, the actual amount of

the tax was collected through a tax suspension system. The purchasing

manufacturers provided the vendors with a tax suspension certificate

or gave them their number In the "Directory of Producers" which was

compiled and brought up to date quarterly by the taxing authorities.

In the case of exporters the tax was permanently suspended.3

In 1948, the basic structure of the production tax was altered

In a manner which permitted the change-over to the value added tax In

1954.4 The tax suspension system was replaced by a fractional payment

technique (the same as Is now used under the value added tax) where

each manufacturer paid his tax on all sales regardless of whether they

were to other producers or sales of finished products to the consumer.

He was pesmitied, however, to deduct from thls liability any tax he

had borne on the products purchased up to this point in the production

process. The tax paid on purchases in one month was deductible from

the tax Iliabi li ty In the fol lowi ng month,41

395ul livn vaJa._P ) ];.

40Due, s. cl. In fact, many authors label the production
tax of 1948 the beginning of the value added tax. Professor iNorr goes
even further. He suggests that the value added tax had Its beginning
In the production tax of 1936, Actually it could probably be argued
that the value added tax in France had its beginning In the single
stage taxes levied in 1925 and 1926.


The various complications and inequities that remained in the

tax system after the reform of 1948) became even an*re unacceptable with

the continued economic growth of the country. This was the case par-

ticularly where there was double taxation due to both the production

tax and the transactions tax being levied on the sane product. In ad*

dition double taxation prevailed due to the inability of the flms to

deduct the services tax against the production and transactions tax

Iabllities or against any subsequent payments of the services tax it*

self. The big factor, however, was the heavy tax penalty that remained

on the purchase of capital goods. Professor Due has estimated this

penalty to be about 18 per cent. To the extent that this tax could

not easily be shifted forward to the consumers of the finished prod*

ucts, the total volume of Investmetnt was restricted, and nodernization

of French Industry retarded.,,42 These factors led to the reform in

the French tax system that began in September, 195), and lasted until

July, 1955, with the value added tax being adopted In the second step

of the basic reform law of April, 1954.43

This Innovation proved to be highly successful and It quickly

meoved up In the system as far as importance of tax yteld is concerned.

In 1962 the total revenue collected in France amounted to approximnately

75 billion II (New Francs) of which the value added tax contributed

appmrnximtely 22 billion NF or approximately 30 per cent of the reve-

nue. It was supplemented by the services tax which contributed an

42M~., P. 122.

43r.~~, p 125.

additional 2.6 billion NF, the local sales tax which contributed 2.3

billion NIF, and various other consumption based taxes. The total yield

from all of the consumption based taxes was approximately 53.1 per

cent of the total tax revenue as compared with a yield of only about

30.4 per cent from the taxes on income and wealth.W The remaining

16.5 per cent resulted from various other taxes.

Provisions of the French Value Added Tax

Since the value added tax is only one segment of the tax sys*

tem, the law is very specific as to whom and what products are subject

to the tax, As a general rule the tax applies to all manufacturers,

wholesalers, building contractors or entrepreneurs of fixed construc-

tions chain store retailers, importers, and all purchasers of certain

items such as precious jewelry.4 Farmers, fishermen, artisans, and

the members of the professions are exanpt from the tax. Retail lers

with the exception of the chain store retailers are also exempt. The

chain store retailers were made subject to the tax on the theory that

they take over many of the functions usually performed by the whole-

salers. The government has attributed Its failure to extend the

value added tax to all retailers to the accounting problems of the

small retailers. This is particularly Important in France where there

is a very large number of very small retailers,

44ullivan, on M., pp. 51-52.

45ibld., pp. 83-85.

tanrtin Norr, "Sales Taxes in Europe and Canada," Reoto
the 19362 Conference (Canadian Tax Foundat lon, 1963), p. 248.

Rge.-T.-Th French use a differential rate system; therefore,

the tax is somewhat progressive In that the rates range from 0 to 25

per cent. These rates apply to the price of the article Including the

tax, thus giving effective rates that range from 0 to 5).33 per cent.4

As an example of this assume the tax rate is 20 per cent end the sales

price of the Item under consideration is $100. The tax on the itea

then is $20 with the seller realizing $80 net of tax. Thus the effec*

tive rate is higher then the nominal rate. In this example the effec*

tive rate would be 25 per cent.

The first rate bracket Is 0 per cent. This bracket includes

most of the food products classified as necessities, which Include such

items as farm products, bread, mlik, butter, cheese, and fresh and

frozen fish. In addition to these exempt foor' products, newspapers

and a few other items are exempt. The second rate bracket Is 6 per

cent (6.38 per cent effective rate). This bracket applies to a few

widely consumed food products not included In the first breckt such

as wheat ff our, sugar, chocolate, and chicory. The third rate bracket

is 10 per cent (11.11 per cent effective rate) and applies to such

items as coal, water, gas, electricity, fertilizers, soap, Insectl*

cides, and to almost all agricultural products that have undergone only

slight transformation. The fourth rate bracket is 20 per cent (25 per

cent effective rate) and 15 Considered the normal rate and is applied

4The effective interest rate is calculated by the use of the
algebraic formula: Effective Rate wheTktre t Is the nomilnal
interest rate. For a table of effective rates for nominal rates rang-
ing from .10 to 27.0 per cent see Sullivan, PIr~ ., p. 297.

to all products not specifically listed under one of the other brackets

and includes most machinery and capital goods.

the reai~ning brackets range from 23 to 25 per cent (29,87 to

33.33 per cent effective rates) and apply to a long list of products

classified as luxuries.

They encompass such categories as ornaments and jewr-
elry, perfume and beauty products, furs, photographic
eluipment other than that used by professional photog-
raphers, smokers supplies, watches, mirrors and glass,
various alcoholic and nonalcoholic beverages including
mineral waters, certain luxury foods (truffles, pate de
fole gras, caviar, and all food preserves not subjected
to a reduced rate), certain publications on special paper
and of limited circulation, as watt as all componenfi
and articles used in conditioning the luxury Itemts.

this differential rate system introduces soem complexitles Into

the tax system that would not be found in a tax system that applied

only one rate to all value added by each Individual firm. 9 All ex-

part transactions are exempt from the tax and a tax credit Is given

49At the present time there is a proposal before the French
government to replace the normal rate of 20 per cent (25 per cent ef-
fective rate) with a1 new normal rate of 16.5 per cent (19.76 per cent
effective rate) and to have only four brackets. The 6 per cent (6.38
per cent effective rate) bracket would be retained and would include
most of the items that are xnempt under the present law as welI as the
Items already In this bracket. The 20 per cent bracket (25 per cent
effective rate) would also be retained but would include only a few
items such as electrical appliances, sporting equf pmnent, passenger
cars, at ceaera. A new bracket of 12 per cent (13.636 per cent effec*
tive rate) would be introduced and would include various items such as
petrateum products, fertilizers, water, gas, electricity, wine, bevl
erages, public transportation, restaurants, hotels and some edibles.
Also the proposal calls for the extension of the tax to the retail
level and to extend it to services. The Intention here is to eliminate
the services and other miscellaneous consumptlan taxes. For an outline
of this proposal see Arthur Anderson & Co., TxadTaeGie*rne
Supolement Number i (Chicago: Arthur Andersen 6 Co., 1965), pp. 23-24

for any tax that may have been paid on earlier transactions Involving

the export goods.

A few of the above provisions have been modified somewhat.

Wholesalers are permitted to elect to become subject to the local sales

tax instead of the value added tax if they find it advantageous.50 If

they make this election, however, they lose the privilege of deducting

the value added tax paid earlier in the process and passed on to them,

If the wholesalers sell at retail as, well as at wholesale, they are

allowed a reduction of the selling prices on items subject to the tax

so as to place the tax on a wholesale basis. Small manufacturers

(those with sales under $80,000) have the option of paying the serv-

ices tax.1

The Tax Credtt Mecheln~a.--The French value added tax is of

the consumption type since lanediate deduction can be made through the

tax credit mechanism for any tax paid on the purchases of capital

equipment. Moreover, "the tax credit system is the heart of the French

value-added tax."52 Each taxpayer Is permitted to credit the tax paid

on his purchases against the tax payable on his sales. A simple exam-

pie can itiustrate this point. Assume that a manufacturer purchases

material for $1,000 and processes these materials and sells them to a

50Arthur Andersen & Co., Tax anrd Trade Guide-- Arthur Andersean & Co., 1961), p. 69.

51For a discussion of the value added taK In relation to Serv-
ice oriented firms In the Florida economy, see pages 181 and 183

52Mertin Norr, "Sales Taxes In Europe and Canada," Repot of the
1962 Conferaenc (Canadian Tax Foundation, 1963), p. 249.

wholesaler for $5,000 who in turn sells them to a department store, for

$10,000. These data are presented in Table, 3.



Transfer Added
Prige Tax

Raw mater als purchased by manufacturer: $ g

Value added tax payable (20% rate on
total sales price)

Manufacturer processes materials and then sells
them to wholesaler for $@~S
Which includes value added tax @ 20%
of $5,000 $1,000
Less value added tax paid by manufacturer
on purchase 0
Value added tax payable by manufacturer on
this sale $ 0

Wholesaler then sells the goods to a department
store for $
Which includes value added tax @ 20%
of $10,000 $2,000
Less value added tax payable by wholesaler
on purchase by him .0
Value added tax payable by wholesaler on this sale $@se

Total value added tax on all transactions $@4I

Source: Based upon example found in Arthur Andersen & Co.
Tax and Trade Gulide-France (Chicago: Arthur Andersen & Co., 1961),
p. 67.

In order for the purchaser to be able to deduct the tax paid

on his purchases fnro his tax liability, it must be quoted separately

on the invoice. This requirement (at least on the surface) facilitates

the shifting of the tax forward to the ultimate consumer and it is

generally expected that It will be shifted In this manner. Moreover,

this separate quotation of the tax facilitates the auditing of taxpayer

returns in that the tax deductions shown on one return wtl $ appear as

a llabt13ty on another return. The 11abii~ty for the payment of the

taK is Incurred upon the delivery of the goods to the purchaser and

not at the time of the payment for the goods.

If In any period the tax credit is greater then the tax liabil*

Ity, the excess may be carried forward to subsequent periods. There ear

no reimbursements, however, except In the case of exports. It is spe-

cifically stated In the law that "Except in the case of exportation,

the deduction envisaged [the tax credit] mnay not result in a reimburse-

ment, even a partial one, of the tax having burdened a given conne~d-

Ity."53 This has become known as the "buffer rule." Apparently this

provision was inserted into the law to prevent possible evasion through

the understatement of sales and the overstatement of purci~;ses although

Its stated purpose as indicated by a goernmental reply to a question

raised by the legislature Is to assure the neutrality of the tax bur-

den, primDarily In the application of the value~added tax to the anu*u

facture of products and to the accomlplishment of construction


Treatment of Cooltal EQIuPment Ex~enditures.-*Under the value

added tax In France, capital expenditures are In effect exempt frmn

S$Quoting from Sultivan, oa M ., p. 58.

taxation. That is, any tax paid on capital equipment purchases is

permitted as a reduction In the tax liability of the purchaser. This

Is equivalent to permittilng a complete deduction for total capital ex-

penditures from the value added by a firm during the period In which

the purchases are made. This can be seen from a simple illustration.

Assume a flrm purchases a capital asset for $2,000. This cost includes

$400 of tax at the 20 per cent rate in effect In France. This $1+00 Is

permitted as a reduction of the tax liability incurred on any sales

made. If Instead, a complete deduction of the $2,000 expenditures were

permitted from the value added by the fi rm the same $400 reduction in

the tax liability would be obtained. This deduction, however, does not

preclude further deduction of depreciation In calculating the corporate

? income tax.

The deduction of the tax paid 1s permitted on all purchases of

capital equipment except motor vehicles, office furniture, and items

pertaining to trading premises or office space.55 This deduction of

the tax paid against the tax liability apparently came about because

of the general feeling that the tax burden on capital equipment was a

drag on the nodernization and expanslan of French industry and this

"was intolerable In a country which has, made wider use of tax Incen-

tives for growth and expansion, and especially of selective tax Incen-

tives, than any other in the western world."S6 It appears to be the

general conclusion that the value added tax has worked well through its

55Arthur Andersen & Co., Tax and Trade Guide--France, p. 68.

56Norr, op.....t., p. 248.

use as an investment incentive. This can be seen from the following

conclusion drawn by Professor Norr.

To get growth, the French reward growth. So far as
the French are concerned, thl sl ncenti ve works. The ex-
tension of the value-added tax credit to cover tax suf-
fared on purchases of capital equipment is a major Incen-
tive to modernization and development. Stated briefly,
it means that the French tax system is blesed in favor
of modern methods of production.57

Treatment of imports and Exports.--The French tax systema uses

the country of destination principle as far as imports and exports are

concerned. The exports are either totally exempt from the value added

tax or a refund Is made of any amount that has been paid on the fabri-

cation of the product up to the point of export. This exemption is

very broad and takes a variety of forms.

First, export sales proper are exempt-sarles for
shipment outside France. Second. "Invisibid' exports
are exempt too--sales within France to non-resident
tourists of things that tourists buy to carry home in
their luggage--perfumne, ties, and so on. That accounts
for those welcome signs In Paris shop win ~wr-20% dis-
count for payment in travellers' cheques.'

There ear a few items that are not exempt from the tax. They are items

such as collectors' Item~s, antiques, et ceters, but these are rela-

tively irnmaterial as far as volume Is concerned.

Professor Due has concluded that "exports are freed completely

from tax burden to a greater extent than In any other sales-tax coun-

try."59 This proves to be quite an incentive since the nonnal effec-

tive tax rate Is 25 per cent.

57g.~, 21r9.

58NHorr, on M ., p. 250.

590ue, 03 ., C p. 127.

imports, on the other hand (except for collectors' 1tems, an-

tlques, et cetera,--those itemns which are not exempt under exports)

are taxed at a 25 per cent rate (not the normal rate of 20 per cent).

The taK is applied when the Items are brought into the country. This,

according to Professor Norr,6 is very important to France since there

are rsoe tax havens nearby (particularly Switzerland) which would per-

mlit a foreign manufacturer to sell goods in France at substantlelly

tower prices than the French producers. But as it stands now even

though the products may bear a lessor burden from the other types of

taxes they bear the same value added tax burden as the products that

are produced In France. To this extent the foreign competitors have

no advantage over the French manufacturers.

The Michtiqn Buslpess Activitles Tax

The Michigan Business Activities Tax la hybrid fonn of the

value added tax, since it has numerous modifications from the value

added base), unlike the French value added tax did not evolve f ram the

existing tax system. it was not, however, a detlfberate attempt to ex*

periment or pioneer in the Cfied of taxation although it is unique as
far as taxation in the United States is concerned. Rather it was an

"eleventh hour attempt to stave off the corporate 'profits' tax."61

in 1953. the Michigan legislature found the s~tat In seriousi financial

difficulties and was given the awesome task of developing new -ources

60Norr, lo. i.

6C. w. Lock, D. J. Ray, and H. D. Hamilton, "The Michigan
Value-Added Tax," National Tgx Journal, VIII (December, 1955), 359.

of revenue to fulfill the financial responsibilities of the state.

This financial crisis arose out of annual deficits amounting to nearly

$90 mi lion that had accumulated In the Michi gan General Fund by 1953.

The causes of these deficits are not of interest here and have been

given detailed analysis elsewhee;6 therefore, no attempt will be

made to analyze themn In this paper.

The problem of providing the necessary revenues apparently had

two solutions--at least two received strong backing: (1) a corporate

Incme tax, or (2) an amendment to the constitution to allminate the

provision which reqluired the distribution of the retail sales tax rev-

enues to the local governments and to retain a larger portion of 1' In

the General Fund. This last alternative had been reconnnded in a

study by a group of private citizens that had been authorized to In-

vestigate this problem. The first proposal, w~hile it was favored by

many small businesses, was immnediately attacked by the corporations,

particularly General Motors Corporation and Ford Motor Company. The

corporations, however, did not simply stop with criticizing the corpo-

rate Incme tax proposal; Instead, they suggested an alternative source

of revenue--the Business Activities Tax. Since this tax had originated

with and received the support of many of the state's large bustnesses,

It was passed with "blita-krica celerity before many members [of the

legislature] had read it, let alone understanding [g)I it."6 The

62Peter A. Firmin. The Michicnu Business Racelots Tax (Ann
Arbor: Bureau of Business Research, University of Michigan, 1953).

631.ock, Ray, and Hamilton, loc. cit.

governor who had been one of the chief proponents of the corporate

profits tax let the blit become law without his signature due to the

critical financial position of the state.

immediately after the tax was enactrd the question was raised

as to wrhat classification of tax the Business Activities Tax should

fall under. ''Students of taxation, economists and language purists

have spent many hours attempting to classify the Michigan Business Ac-

tivities Tax and as yet the question has not been finally resolved."'

The Michigan Da~eprtment of Revenue has taken the position that it is a

form of an income tax (with the base being value added subject to the

various modif ications and exemptions). This is appsrently the, position

that was intended by the legislature since in the Act's Intmoductory

title it states that it is "An Act to provide for the raising of addl*

tlanal public revenue by prescribing certain specific teaxs on income."65

The classification of the tax is important since there are many bust-

nessies (In fact most of the large taxpayers--the big revenue producers)

that are: engaged in inrntertte amnerce and are subject to the tax. if

it cannot be clrssified as an income type of tax then its applicability

could be narrowly restricted due to the interstate comrmerce complica-

tions.6 Moreover, if It Is an income tax there are, according to

64larnce bl. Lock, "Hichlgan's 'Most Unique' Tax," ]][g jijgig,
4a P (October, 1956), p. i.

65Michigan, Rertred Statutes. Annotated, Vol. VI (Rice, 1960),
C. 60.

66This is due to the fact that the United States Constitution
places many restrictions on the types of taxes that a state may use in
the taxation of interstate cusrnerce.

Commissioner Lock, a wealth of court decisions that provide for Inter-

state commrce paying its fair share of taxes as long as there is no

discrimination against the enterprise engaging in interstate com-

merce.6 Regardless of the thit attached to the tax It appears to

have been accepted as a modified foun of the value added tax.

Provisons of the Michican Business
Activities Tax

The Michigan Business, ^ctivities Tax (hereafter referred to as

the value added tax) was originally designed to be of the consumption

type of value added tax as no deductions were to be allowed for depre-

clation. This, however, has been changing over the life of the tax

and It is now very close to the income type of value added tax as will

be pointed out below. Thes~ubtraction method is used to calculate the

value added with the origin principle being followed.

The original version of the Act provided for a rate of 4 mi 11s

to be levied on the adjusted receipts of the business with public

utilities receiving preferential treatment by being taxed at a one mill

rate. The justification of this rate differential was made under the

theory that public utilities were regulated Industries and that they

"Incur expenses of operation out of proportion to the gross receipts

as compared with other bustnesses."6 (Whether or not these are

grounds for rate differentlels is subject to serious questioning.) In

1955 the rates were increased to 6.5 mills an~d 1.5 mi lls, respectively.

Lock, on M ., p. 16.

68lrmin, on M ., p. 5.

The rates were further increased in 1959 to 7.75 mills and 2 mills on

the adjusted receipts obtained frme ichigan sources. These rates are

still In effect. For a business firm to come under the tax, that is,

file a return, It must have gross receipts of $25,000.

The original version of the tax had as its base the adjusted

receipts (value added) of the business f irms. Gross recef pts were de-

fined as "receipts from any activity carried on for galn, benefit or

advantage not specifically exempt."69 Several Items, however, were

excluded from gross receipts. These included such Items as:

1. Wages, salaries or other compensation for services
rendered by an employer.

2. Proceeds of the sale of capt tal assets.

3. Repayments of debts.

4. Amounts received, as agent or otherwise, on behalf
of another.

The adjusted receipts were then calculated by deducting several

items from gross receipts. The deductions were as follows:71

1. Taxes paid or accrued, except those taxes which
are levied on or are measured by not income.

2. All amounts paid to any other activity subject to
the provisions of this act or which would be so
subject if located In the state of Michigan, for
the acquisiltion or use of property, services,
privileges or facllties for the purpose of carry-
Ing on the activity, except property the normal
useful i~fe of which exceeds oner year.


71'9., pp. 4-5.

3. Interest and rents paid.

4. Cash discounts allowed and taken on saI1les

S. Sales returns.

Further, If deductions from gross receipts did not amount to

at least 50 per cent of the gross receipts, the taxpayer was permitted

to take ai minimum deduction of 50 per cent of his gross receipts. In

addition to the deductions mentioned above, there were several items

exempted from the adjusted receipts. These exemptions are summarized


The exemptions Included the first $10,000 of adjusted receipts;

receipts that were prohibited to state taxation by the federal consti-

tution; receipts of non-profit organizations; receipts of agencies or

instrumentalities; state and national banks and trust companies, bulid-

ing and loan and savings and loan associations;, financial businesses;

income from intangible personal property; non-operating railroads which

lease their equipment to operating roads; parl-mutuall betting; and

casual or isolated transactions.72

Even though the amendments to the original act have been kept

to a minimum, a few significant changes have been made. Probably the

most important was the change made in 1955 that permitted the deduc*

tton of a depreciation allowance but on real property only. Deductions

for depreciation on personal property are stlit not permitted. Thus

the tax discriminates against the use of personal as compared to real

property. This has created many problems both In terms of equity and