Tax Policy

For several years, a federal value-added tax (VAT) has been discussed as a way to reduce the budget deficit, reform the current federal tax system, or fund new programs. A VAT would likely be administered by the Internal Revenue Service (IRS) with the support of the Customs Service and the Federal Reserve System. GAO estimates that administering a simple, broad-based VAT in 1995 would cost the government between $1.22 billion and $1.83 billion annually, depending on the number of taxpayers subject to the tax. Were the VAT to include exemptions and multiple rates, the administration costs could run as much as $700 million higher. During the transition to a VAT, about $800 million would be needed for taxpayer education, staff training, and computer systems. A substantial amount of time--from 18 to 24 months optimally--would be needed to properly prepare for a VAT. A key element of a successful transition would be an intensive educational campaign aimed at promoting compliance. This report also discusses how alternative designs could affect administrative costs.

GAO found that: (1) single-rate, broad-based VAT would promote economic neutrality among goods and services, minimize compliance burdens for the taxpayer, and minimize administrative costs; (2) multiple tax rates and product exemptions would increase administrative costs; (3) more complicated VAT increase the opportunity for taxpayer errors and evasion and the difficulty of auditing administration; (4) according to a 1984 report, the Internal Revenue Service (IRS) would need 18 months to prepare for VAT; (5) IRS would need time to assess staffing requirements, hire new staff, and train staff on the new tax; (6) successful institution of VAT would require careful planning and an intensive educational campaign; and (7) educating the U.S. public on VAT would require tax administrators to educate the public, businesses, and tax preparers.