A Value Added Tax and Factors Affecting Its Economic Impact

Abstract

SEPTEMBER 1973 tion, and the credit or invoice methods. The ad-dition and the subtraction methods involve different approaches to computing the tax base. The credit method calculates the tax liability itself, without re-quiring explicit measure of a firm's value added. In practice these three computational procedures are only approximately equivalent. 1 The addition method of computing the VAT base is to sum the firm's payments of wages, salaries, in-terest, rent, and profits. These payments represent the firm's contribution to the value of the economy's output in the period, or its " value added. " This base multiplied by the tax rate indicates the amount owed the government in value added taxes. The subtraction method computes each firm's value added as sales less purchases of material inputs from other businesses. The credit method computes the tax by applying the tax rate to sales and then subtracting taxes paid on purchases of components. \ T alue added taxes in Euro-pean countries are usually computed by the credit method.