This study, using an input-output model as the analytical framework, examines the effects of substituting a consumption-type valued-added tax for the business tax (a turn-over tax) on output prices and the distribution of net tax liabilities at both aggregate and industry levels. It is an application of so-called differential tax incidence. Based on actual input-output coefficients and other related data for 1982, the study attempts to determine required compensating VAT rates, changes in output prices, and associated redistributions of tax liabilities under four tax-shifting conditions, depending on whether each of the two taxes involved in the substitution is completely shifted forward or not.
Under the most plausible assumption of complete forward shifting for both the business tax to be abolished and the value-added tax to be introduced, the required VAT rate, which is sufficiently high enough for the government to purchase the original bill of goods and services while keeping the same original nominal level of budgetary surplus or deficit unchanged, would be approximately 4.6 percent. Moreover, under the same shifting condition, the consumption goods price would increase by 1.5 percent while the prices of both capital goods and export goods would decrease also by 1.5 percent.
Had both taxes not been shifted forward, the required VAT rate would be 4.15 percent and the prices of both investment and export goods would fall by more than 3 percent while the prices of consumption goods would remain the same. In this case, both investors and exporters gain from the redistribution of tax liabilities at the expense of producers. These gains and losses, however, must be added together for the same industry in determination of the distribution of net tax liabilities among industries. It is therefore found that a small number of industries with large export sales and/or requiring heavy investment would benefit most from the tax substitution while a majority of the remaining industries would be the losers.
