VAIT - The Value Added Income Tax
By Jalexson c. 1992
The United States needs to replace its corporate
profits tax with a Value Added Income Tax(VAIT). The corporate profits
tax has outlived its usefulness. It discriminates against American businesses
and hampers efforts to modernize American factories. A VAIT could increase
federal tax revenues without increasing the burden on most American companies.
The VAIT would treat corporate income in terms
of the value added by the corporation and ignore the whole question of
profit and loss. In its simplest form the VAIT would apply to income(revenue)
minus taxed costs, primarily purchases from VAIT paying businesses and
labor costs subject to employer matching F.I.C.A. tax.
The VAIT would be somewhat similar to the European
Value Added Tax(VAT). Tax deductable costs would have to be related to
revenue sources. The cost of purchasing another company's stock wouldn't
be deductable from revenue generated by sale of manufactured goods. Purchase
of imported goods wouldn't qualify as a deductable cost. A more complex
VAIT could disallow deductions for nonessential costs such as expensive
corporate furnishings.
The broader range of income subject to the
VAIT would allow a much lower rate without reducing tax revenue. Ignoring
the profitability of corporations would spread the tax burden among more
companies including those that show a profit for stockholders but not for
tax purposes.
The current corporate tax structure has become
so complex that the cost of figuring taxes increases the prices of American
goods while reducing federal tax revenues. Replacing it with a simpler
tax system would eliminate some unnecessary business costs.
Taxing corporate profits made sense decades
ago when a business subtracted its expenses from its revenues at the end
of the year and considered whatever was left profit. Today a corporation's
profit is whatever the accounting department says it is. Changing the way
a corporation handles inventory or depreciation can mean the difference
between profit and loss. Some corporations create public relations problems
for all businesses by using accounting methods that show a profit for stockholders
but a loss for tax purposes.
Basing the corporate tax on profits places
the highest tax burden on American manufactured goods. Foreign companies
do not pay American profits taxes and thus purchases of foreign manufactured
goods do not generate the same federal tax revenues as purchases of American
made goods. Shifts in American buying habits have played a greater role
in reducing the role played by corporate taxes than "tax loopholes".
Corporate profits do not provide an adequate
measure of corporate income. A corporation can survive and grow without
ever showing a profit so long as stockholders do not object. A corporation
owned by management does not need to show a profit because managers can
reward themselves with higher salaries or bonuses instead of stock dividends.
High management salaries and benefits have also reduced corporate tax revenues.
The corporation can use depreciation of purchases or show paper losses
on financial dealings to avoid showing a profit. Stockholders may prefer
to benefit from increased stock prices rather than dividends.
From a technical standpoint no American corporation
pays income taxes. "Revenue" is the term for a corporation's income. The
term "profit" applies to stockholders' income. Profits may be distributed
to stockholders or used to enhance the value of the corporation and thus
increase the value of the corporation's stock.
The current corporate profits tax creates economic
problems. Federal tax rates can discourage corporations from operating
at a profit. Government must then create special tax breaks for favored
industries to stimulate profitable operations. Operating a corporation
with one eye on the tax situation causes corporations to make what otherwise
would be dysfunctional business decisions. Businesses and individual investors
may become so preoccupied with tax situation that they ignore income producing
opportunities.
The VAIT would ignore the question of profit
and loss. the tax would apply to revenue minus costs upon which federal
taxes have already been collected. The primary reason for deductions should
be to prevent double taxation. A purchase from a business that pays the
VAIT could be a deductible cost. A purchase from a foreign supplier, a
non-profit corporation, or some other non-VAIT paying entity could not
be deducted. Manufacturing costs at plants outside the United States would
not be deductible. Partnerships and other types of businesses would have
the option of operating as a corporation for tax purposes. Employee expenses
subject to employer matching F.I.C.A. tax would be deductible because the
corporation would already pay a federal tax on the expense.
The tax should be revenue and cash flow oriented.
Generally revenue would be taxable during the tax period the corporation
received cash or its equivalent. Relevant costs would be deductible during
the period the corporation expended cash or received revenue. The latter
approach would be especially useful for companies that manufacture products
with long lead times or for research and development expenses. A company
wishing to expand could expend current revenue on additional supplies or
equipment. A company could deduct the cost of some planned purchases of
buildings and equipment by committing cash to such a purchase. Failure
to complete the transaction would subject the company to paying the appropriate
tax plus interest.
Deductions would have to relate to revenue
sources. For example, purchase of raw materials would be deductible from
revenue received from the sale of the finished product. The purchase of
stock as an investment would be deductible only from the sale of investment
stock, not from the sale of the company's manufactured products.
This approach would replace arbitrary assignment
of a depreciation period for building and equipment deductions. Corporations
can adapt to technological changes better if they can purchase the newest
equipment and discard the old as fast as they can generate the necessary
revenue. Preoccupation with depreciation schedules can financially lock
a company into outdated equipment.
The need to use depreciation to expense an
item may force a company to borrow money rather than use revenue. Otherwise
the company would have to use the revenue for tax expenses rather than
to purchase new equipment. With borrowing, the company can pay out a amount
of cash equivalent to the amount of depreciation expense. Using revenue
could require the company to pay more because of the difference between
revenue and the amount of depreciation allowed for tax expense.
I also write at Mediard
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