The tax reform revolution: "the four approaches to tax reform—flat, USA, national sales, and value-added—all are variations on the same theme. All would shift the base of Federal taxation from income to consumption while simplifying the process of complying with tax law."

USA Today (Society for the Advancement of Education), Jan, 2005 by Murray Weidenbaum

Turning to administrative aspects, Federal imposition of a sales or value-added tax would require establishing a new tax-collection system by the government and new record keeping on the part of taxpayers. However, much of the current tax-collection system could be eliminated (except for the collection of payroll taxes for Social Security and Medicare).

Value-Added Tax. The VAT is, in effect, a comprehensive sales tax that avoids the double counting otherwise inevitable when the same item moves from manufacturer to wholesaler to retailer. In total, a VAT should be equivalent in yield to a single-stage sales tax levied at the retail level. Essentially, a firm's value added is the difference between its sales and its purchases from other firms. Value added also can be estimated by adding labor and capital inputs supplied by the firm itself--represented by wages and salaries, rent and interest payments, and profit. Although the top-down consumption tax notion remains a theoretical concept, the bottom-up VAT now is an existing tax in many countries.

Proponents of the VAT contend that it is economically neutral because, ideally, it is levied at a uniform rate on all items of consumption (unless exceptions are made to soften its regressive nature). The VAT does not distort choices among products or methods of production. Thus, shifting to a more capital-intensive and perhaps more profitable method of production does not affect the tax burden. Nor is the allocation of resources across product, market, and industry lines impacted. In these regards, the VAT is superior to the existing array of selective excise taxes.

Advocates of the value-added tax also point out that, in contrast to an income tax, there is no penalty for efficiency and no subsidy for waste. Moreover, the VAT is neutral between incorporated and unincorporated businesses and, theoretically, even between public and private enterprises. By focusing on consumption, it avoids a double-tax burden on the returns from capital. This tax starts off with no exclusions or exemptions and thus, at least initially, provides a broader and fairer tax base, one that the underground economy will have more difficulty evading.

Another argument in favor of U.S. adoption of a value-added tax is that so many other nations have implemented this form of revenue gathering. It fits in better than other taxes with the growing international character of production. The VAT has become one of the revenue workhorses of the world. It is a key component of the tax system in more than 120 countries, raising about one-fourth of the world's tax revenue. Virtually every important country in Europe imposes this tax, and it has spread throughout the Third World. France has used value-added taxation since 1948, and other members of the European Union have done so since the late 1960s or early 1970s. Canada adopted a seven percent VAT in 1991.

Unlike the situation in the U.S., though, the adoption of a tax on value added was true reform in those countries. That is, value-added taxes typically replaced an extremely inefficient form of consumption tax that already was in place: a cascading sales or turnover revenue system. Those latter taxes apply to the total amount of a firm's sales rather than only to its value added. Thus, sales taxes would be paid over the production process. Cascade-type taxes favor integrated firms (which legally can avoid one or more stages of the tax), but they severely discriminate against independent companies that operate at only one phase of the production process.