VAT and worldwide unitary

A Value Added Tax avoids some problems of the income tax.  For instance, the income tax often can’t locate the income of a cross-border corporation (multinational enterprise).  That snipe hunt now requires folks to use the arm’s-length method of sourcing income.  That method was a joke, the last time I looked, but this useful option shows up in The Shelf Project :  “Tax the global income of all companies that do business in the United States on a consolidated basis with income allocated based upon sales, employment or other real world drivers, rather than relying upon transfer pricing regimes.” http://www.taxshelf.org/wiki/Stubs_for_Foreign.

If that option, a worldwide unitary income tax, makes sense but seems remote, a fallback is available: a Value Added Tax.  A VAT seems a little like a worldwide unitary income tax that uses sales as the sole factor for income allocation.

The VAT uses sales as its base;  single-factor sales unitary uses corporate income.   Using income for a base may seem fairer, but giveaways decimate the income tax base.  And multinationals’ income, if it can be found at all, is likely to be assigned to low-tax countries.  Compared to income, sales are easy to find and measure.

The VAT lacks progressivity, but U.S. corporate tax rates are not steeply progressive.

The VAT uses sales as a base, so it loses whatever advantage comes from two traditional unitary factors, property and payroll.  But those two factors may not be useful for unitary now.  Payroll and property are the targets in a race to the bottom among jurisdictions like my State, North Carolina, that give tax breaks to companies that bring them in – or maintain them.  Using them in the unitary method cuts against what jurisdictions want.  Moreover, using a property factor requires people to find intangibles and measure them, which puts us back in the soup.

Arguments against a single-factor sales method appear at http://www.itepnet.org/pdf/pb11ssf.pdf.

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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