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63 Tax L. Rev. 477 (2009-2010)
How Should the United States Treat Government Entities, Nonprofit Organizations, and Other Tax-Exempt Bodies under a VAT

handle is hein.journals/taxlr63 and id is 487 raw text is: How Should the United States Treat Government Entities, Nonprofit Organizations, and Other Tax-Exempt Bodies Under a VAT? PIERRE-PASCAL GENDRON* I. INTRODUCTION The goods and services supplied by the sector that consists of gov- ernment entities, public sector bodies, nonprofit organizations, chari- table organizations, and similar tax-exempt bodies (hereafter collectively referred to as the PNC sector) continue to elude the best practice under the value-added tax (VAT): full taxation of goods and services supplied by the PNC sector, with credit for tax paid on purchases made in order to render the supplies. Although there are very few conceptual problems preventing full taxation of such supplies under the VAT, some roadblocks remain. Often, they come in the form of policy concerns revolving around social objectives and income distribution. To a large extent they explain the exceptional (and ex- ceptionally complex) treatment of PNC supplies under the VAT in many countries. Complexity often arises because exemptions may be restricted to particular items (goods and services), or apply to supplies rendered by certain types of entities, or a combination of both. While the consequences of the VAT-exempt treatment of the sup- plies made by the PNC sector are well understood at the theoretical level, there has been little quantification of its economic effects. The list includes distortions, compliance costs, administrative costs, and the cost savings from using tax or expenditure policy instruments that are better suited than the VAT to achieve distributional and other so- cial objectives. In aggregate, the distortions from implementing the exemption under a U.S. VAT would likely be large. According to re- cent data, the government sector (federal plus state and local) ac- counted for 12.9% of total U.S. value added in 2007. Educational * Professor, The Business School, Humber College Institute of Technology and Advanced Learning, Toronto. I am grateful for helpful comments from Michel Aujean, Satya Poddar, and Alan Schenk, and especially for insightful suggestions from Charles McLure. Of course, I am solely responsible for the contents of this Article. 477 Imaged with the Permission of N.Y.U. Tax Law Review