ABSTRACT
The taxation of goods and services produced in the tax-exempt and government sectors presents difficult problems under a value-added tax. There are two types of value-added taxes, which differ only in the way outlays for investment purposes are treated. The first type permits business firms to subtract purchases of capital goods in computing the tax base. With the second type, purchases of capital goods are not deducted; instead, firms are permitted to deduct an allowance for depreciation over the useful life of the asset. The value-added tax reduces or eliminates the pyramiding that would occur under the turnover tax or the manufacturers’ and wholesalers’ sales taxes. The base of the consumption-type value-added tax is the same as that of a retail sales tax and is confined to goods for consumption. The value-added tax is often supported on the ground that it would increase saving.
