Among other key differences, all purchases from other businesses are deducted immediately under the subtraction-method VAT, including purchases of long-lived assets (no depreciation system but interest expense is not deductible. The most important difference between the credit-invoice VAT and the subtraction-method VAT is how they are collected.
That most countries choose the credit-invoice method over the subtraction method reflects the economic circumstances and the consequences of past tax policy decisions. For example, because the subtraction-method VAT bears a strong resemblance to a traditional income tax, it could be a better, although still problematic, tax system than an income tax, but it would be a poor choice as.
The major difference between the subtraction-method VAT and the business income tax is that the cost of labor is not deductible under the subtraction-method VAT. Labors contribution to output is an integral part of the value added by the business.
The DomeniciRivlin Debt Reduction Task Force has issued the latest call for the U.S. To adopt a VAT to solve its growing debt problem.1 Some argue that a large tax increase is necessary because Congress cannot reduce spending enough to cut the deficit to more sustainable levels.2 On this flawed line of reasoning, the VAT is the logical choice because. The business then submits the invoices that it receives from its suppliers to the governments revenue agency. The invoices detail the amount of VAT that the business paid to its suppliers.
However, unlike a sales tax, the cost of the VAT to consumers would be hidden. Unless politicians took the unlikely step of requiring retailers to state explicitly the portion of the sales price that is due to the VAT, consumers would be unaware of the tax.2. By contrast, some on the left oppose the VAT because of its one redeeming featureit is a consumption-based levy and therefore not as easy to use for economically destructive income redistribution.