A VALUE-ADDED TAX: {TS CGMPUANCE COSTS FOR INDMDUAL UNITED STATES NON-RETNL BUSTNESS FTRMS Bissertation for the Degree of Ph. D. MTCHIGAN STATE UNIVERSITY SET H KELLY PARKER “ 1974 LIBRARY Mitiir‘gen State ‘ 'niversity "‘5“ my.“ This is to certify that the thesis entitled A VALUE-ADDED TAX: ITS COMPLIANCE COSTS FOR INDIVIDUAL UNITED STATES NON-RETAIL BUSINESS FIRMS presented by Seth Kelly Parker has been accepted towards fulfillment of the requirements for Ph.D. degree in Business Administration Major pro 3’5 0-7639 it n . 802W B'NBTRY mc. LIdHAR" B'RQERS SHIIENIT. WM ABSTRACT A VALUE-ADDED TAX: ITS COMPLIANCE COSTS FOR INDIVIDUAL UNITED STATES NON-RETAIL BUSINESS FIRMS By Seth Kelly Parker Adoption of a value-added tax (VAT) has been suggested at both federal and state levels in the United States. The possible VAT compliance costs have not been investigated thoroughly. Thus, any statements by economists, legislators, managers, or accountants con- cerning the possible compliance costs of a single United States firm, or of United States business as a whole, are conjectures. This study identifies and estimates such costs. In this study, two hypothetical VAT laws are developed. One law, defined as the invoice method of computing the VAT, is based on the VAT laws in Europe. This law uses the VAT shown on the invoices both issued and received by the firm as the starting point in computing the firm's VAT liability. The other law, defined as the accounts method of computing the VAT, is based on the Michigan Business Activi- ties Tax. This law uses the firm's ledger accounts as the starting point for computing the firm's VAT liability. -\9 Seth Kelly Parker 1* , V\\IJ' .s The treasurers or controllers of six non-retail business firms with sales of $3.8 to $22 million were interviewed and asked to describe their firms' accounting functions. The researcher determines the changes that each firm would need to make in order to comply with each of the laws and identifies a number of possible compliance costs. These costs are categorized as initial compliance costs (costs the firm would incur only once) and continuing compliance costs (costs the firm would incur each year after the effective date of the VAT). The individual possible compliance costs were estimated by each firm's treasurer or controller, or by the researcher. Some of these costs can be estimated more accurately than others. Although some changes in the accounting function of each firm are required by each of the hypothetical VAT laws, neither law would require a major change in the accounting function of any of the six firms studied. For example, the invoice-type of law sometimes ne- cessitates the rewriting of accounting machine or computer programs. Although such reprogramming is time-consuming, it would not be a new experience or a major change for any of the firms involved. The study shows that neither the total initial or total continuing costs of com- plying with either of the VAT laws exceed 1 percent of firms' sales. Since the cost estimating procedures used in this study are time-consuming and therefore not practicable for all accountants, the study tests linear models that could assist accountants in making esti- mates of costs. Three of these models prove significant: the models for both the initial and continuing compliance costs for the invoice- type of VAT law, and the model for the initial compliance costs for the accounts-type. Seth Kelly Parker This study is the first thorough investigation of the possi- ble compliance costs of a VAT for individual United States non-retail business firms. A VALUE-ADDED TAX: ITS COMPLIANCE COSTS FOR INDIVIDUAL UNITED STATES NON-RETAIL BUSINESS FIRMS By Seth Kelly Parker A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1974 @Copyright by SETH KELLY PARKER 1974 To my mother, Evelyn H. Parker and father, Willis K. Parker ii ACKNOWLEDGMENTS I thank the members of my committee at Michigan State Uni- versity, Professor Charles J. Gaa, chairman, and Professor Gardner M. Jones of the Department of Accounting and Financial Administration, and Professor Maurice D. Weinrobe, of the Department of Economics for their assistance throughout my work. I particularly appreciate the prompt attention they gave to the written drafts I submitted to them. I thank Professor Victor L. Whiteman, School of Social Work, Michigan State University, for assistance in performing the statistical computations and Professor Michael J. Cerullo, School of Business, State University of New York at Albany, for checking my completed sta- tisical work. I thank the six treasurers and controllers whom I interviewed for their time and for the descriptions and estimates that they pro- vided. I thank the persons who answered my questions by phone or by letter; most of these persons are mentioned in my footnotes. I thank my wife, Beverly, and daughter, Susan, for their con- tinuing love and patience. TABLE OF CONTENTS Page LIST OF TABLES ......................... viii LIST OF FIGURES . . . . . ................... x Chapter I. INTRODUCTION TO THE STUDY, HYPOTHESES STUDIED, AND LIMITATIONS OF THE RESEARCH .............. 1 Introduction ..................... 1 Brief Statement of What Was Investigated ....... l General Description of a Value-Added Tax ....... 2 Types of Value-Added Taxes ........ . . . . . 2 Methods of Computing the Value-Added Tax ...... 3 Classification of a Value-Added Tax as a Sales Tax . ll Background Concerning the Proposal and Adoption of Value-Added Taxes .................. 14 Current Pressure for a Value-Added Tax in the United States ....................... 19 Review of Existing Literature Concerning the Cost to a Firm of Complying with a VAT ........... 27 Importance of This Study ............... 34 Hypotheses ...................... 36 Limitations of the Study ............... 37 II. METHODOLOGY - DEFINITIONS, ASSUMPTIONS, AND SELECTION OF THE MODELS TESTED ................. 40 Definition of Terms .................. 4O Assumptions Made . . ................ 44 Selection of the Models Tested in Hypotheses 6 and 7 . 46 III. METHODOLOGY - DEVELOPMENT OF HYPOTHETICAL INVOICE-TYPE VAT LAW AND ITS RAMIFICATIONS ............. 47 Development of the Law ................ 47 Scope of the Tax .................. 49 Tax Mechanism .................... 54 iv Chapter Page Tax Rates . . . . .................. 57 Exemptions and Zero-Ratings ............. 59 How Certain Business Events Would be Treated ..... 64 Transitional Measures ................ 64 Taxable Base and Discounts ............. 65 Sales of Used Goods Including Capital Assets . . . . 66 Returns of Merchandise ............... 66 Uncollectible Accounts . . . . . . . . . . ..... 66 Disappearance of Inventory ............. 67 All VAT Paid by a Firm will be Deductible by the Firm, with Exceptions ............... 67 Self-Deliveries ................... 68 Miscellaneous .................... 69 Accounting Required by the Hypothetical Law ...... 70 Frequency of VAT Returns and Payments ........ 70 Information Required on the Quarterly and Annual VAT Returns ................. . . . 71 Information Required on the Monthly VAT Return . . . 80 Special Annual Listings of VAT Invoiced to Customers and by Suppliers ................. 80 Information to be Required on Sales Invoices . . . . 8l Ledger Accounts ................... 86 IV. METHODOLOGY - DEVELOPMENT OF HYPOTHETICAL ACCOUNTS-TYPE VAT LAW AND ITS RAMIFICATIONS ............. 88 Development of the Law ................ 88 Scope of the Tax .................. 89 Tax Mechanism .................... 90 Tax Rates ...................... 96 Special Treatment for Particular Organizations, Goods and Services, and Transactions .......... 97 How Certain Business Events Would be Treated ..... 98 Accounting Required by the Hypothetical Law ...... 99 V. METHODOLOGY - COLLECTION OF DATA AND COST ESTIMATES . . . 101 Collection of Data .................. lOl Type and Number of Firms Studied .......... lOl Conducting the Interviews .............. l02 Estimating the Changes Required in the Accounting Function of Each Firm Studied ........... llO Cost Estimates .................... lll Chapter VI. VII. Preparing the Cost Estimates ............ Estimates of Wage Rates .............. Estimates of Personnel Performance and Training Times ...................... Estimates of Non-Personnel Costs .......... CONCLUSIONS FOR THE INVOICE METHOD OF COMPUTING THE VAT .......................... Hypothesis 1 . . . . . . . . . . . . . . . . . . . . . Conclusion for Hypothesis l ............ An Implication of the Finding for Hypothesis l . . . Hypotheses 2 and 3 .................. Conclusion for Hypothesis 2 ............ Conclusion for Hypothesis 3 ............ Hypotheses 4 and 5 .................. Conclusions for Hypotheses 4 and 5 ......... Some Implications of the Findings for Hypotheses 4 and 5 ..................... Hypotheses 6 and 7 .................. Conclusion for Hypothesis 6 ............ Conclusion for Hypothesis 7 ............ Some Implications of the Findings for Hypotheses 6 and 7 ..... , ............... CONCLUSIONS FOR THE ACCOUNTS METHOD OF COMPUTING THE VAT .................... . Hypothesis l ..................... Conclusion for Hypothesis 1 ............ Hypotheses 2 and 3 .................. Conclusion for Hypothesis 2 ............ Conclusion for Hypothesis 3 ............ Hypotheses 4 and 5 .................. Conclusions for Hypotheses 4 and 5 ......... Some Implications of the Findings for Hypotheses 4 and 5 ..................... vi Page 111 113 121 132 135 135 149 149 150 199 199 200 203 203 221 223 241 243 Chapter Hypotheses 6 and 7 .................. Conclusion for Hypothesis 6 ............ Conclusion for Hypothesis 7 ............ Some Implications of the Findings for Hypotheses 6 and 7 ..................... VIII. SUMMARY AND IMPLICATIONS ................ Summary and Implications of this Study ........ Implications for Further Research .......... SELECTED BIBLIOGRAPHY ..................... APPENDICES APPENDIX APPENDIX APPENDIX APPENDIX APPENDIX APPENDIX APPENDIX CONSTRUCTION OF COMPONENTS OF FORMULA USED TO INCREASE REPORTED HOURLY WAGE RATES OF EMPLOYEES WITHIN THE FIRM ................ STANDARDS FOR COMMON OFFICE OPERATIONS USED IN THE DEVELOPMENT OF TIME ESTIMATES FOR THE PER- FORMANCE OF CERTAIN ACCOUNTING OPERATIONS RE- LATED TO A VAT ................. DETAILS OF TIME ESTIMATES FOR THE PERFORMANCE OF CERTAIN ACCOUNTING OPERATIONS RELATED TO A VAT ...................... SUMMARY OF ESTIMATED INITIAL COMPLIANCE COSTS BY FIRM FOR THE INVOICE METHOD OF COMPUTING THE VAT ...................... SUMMARY OF ESTIMATED CONTINUING COMPLIANCE COSTS BY FIRM FOR THE INVOICE METHOD OF COMPUTING THE VAT ........ . ............. SUMMARY OF ESTIMATED INITIAL COMPLIANCE COSTS BY FIRM FOR THE ACCOUNTS METHOD OF COMPUTING THE VAT ..................... . SUMMARY OF ESTIMATED CONTINUING COMPLIANCE COSTS BY FIRM FOR THE ACCOUNTS METHOD OF COMPUTING THE VAT ...................... vii Page 248 260 265 267 277 283 289 295 LIST OF TABLES Table Page 1. Calculation of the Value-Added or VAT Base(s) to Which the VAT Rate(s) Could be Applied for the Direct Additive and Direct Subtractive Methods ......... 8 2. Calculation of the Value-Added Tax for the Indirect Additive and Indirect Subtractive Methods ........ 9 3. Calculation of the Value-Added Tax: Indirect Subtractive Method Applied to a Consumption Type of VAT (Alternate Form of Presentation) .................. ll 4. Abbreviations and References Concerning Value—Added Taxation ........................ 50 5. Possible Applications of a VAT and the Resulting Action Required of an Organization ............... 62 6. Summary of Possible Sales and Self-Deliveries for a Business Firm ...................... 74 7. Ledger Accounts Needed for the Invoice-Type of VAT . . . . 87 8. Description of the Firms Studied ............. 103 9. Description and Volume of Accounting Activity Per Year Per Firm ........................ lOS 10. Number of Persons in the Accounting Function Involved in the Processing of Sales and Suppliers' Invoices ..... l07 ll. Summary of Methods of Processing Sales and Purchases Within Each Firm .................... 108 l2. Cost to the Firm Per Hour and Minute of Effective Pro- duction Time for Selected Types of Employees ...... ll5 13. Time to Perform Certain Accounting Operations Related to a VAT ........................ 124 viii Table l4. l5. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. Estimated Time to Train Employees Concerning a VAT . . . . Time to Perform Certain Accounting Operations Related to a VAT ........................ Code Letters Indicating Source of Personnel and Non- Personnel Dollar Cost Estimates ............ Code Letters Indicating the Persons or Firm to Whom the Cost Estimated Relates ................. Summary of Possible Compliance Costs for the Invoice Method of Computing the VAT .............. List of Possible Initial Compliance Costs for the Invoice Method of Computing a VAT ............... List of Possible Continuing Compliance Costs for the Invoice Method of Computing a VAT ........... Number of Compliance Costs for an Invoice-Type of VAT by Source of Estimates .................. Dollar Estimate of Possible Compliance Costs for an Invoice-Type of VAT .................. Impact on Total Compliance Costs of Five Provisions of the VAT Law and Certain Estimates ........... Number of Sales Invoices plus Suppliers' Invoices Pro- cessed Per Year and Gross Sales ............ Hypothesis 7 Applied to the Barker Study ......... Summary of Possible Compliance Costs for the Accounts Method of Computing the VAT .............. List of Possible Initial Compliance Costs for the Accounts Method of Computing a VAT ........... List of Possible Continuing Compliance Costs for the Accounts Method of Computing a VAT ........... Number of Compliance Costs for an Accounts-Type of VAT by Source of Estimate ................. Dollar Estimate of Possible Compliance Costs for an Accounts-Type of VAT .................. Impact on Total Compliance Costs of the Implementation Date of the VAT Law and Certain Estimates ....... ix Page l29 131 154 219 226 234 244 LIST OF FIGURES Figure Page l. Specimen Quarterly and Annual VAT Return for the Invoice- Type of VAT ....................... 72 2. Specimen Sales Invoice for the Invoice-Type of VAT . . . . 82 3. Business Activities Tax - Annual Return .......... 9l CHAPTER I INTRODUCTION TO THE STUDY, HYPOTHESES STUDIED, AND LIMITATIONS OF THE RESEARCH Introduction This chapter presents hypotheses and background material for the study. Subsequent chapters will present the methodology of the study, its conclusions, and implications. In this first chapter, the value-added tax (VAT) is described and some background is given concerning the proposal and adoption of such a tax. Included is a discussion of reasons that have been advanced for the adoption of a VAT in the United States and a review of litera- ture concerning firms' costs of complying with a VAT. The remainder of the chapter discusses the importance of the present study, the hypotheses that the study will test, and the limits imposed upon or inherent in the study. Brief Statement of What Was Investigated The study investigates the effects of a VAT on the operation of the accounting function in individual United States non-retail busi- ness firms. It concerns the accounting function's structure (e.g., the number of people employed) and procedures and with both the possible initial and continuing costs of complying with a VAT. Six manufacturing 1 firms were studied in detail. Within each of these firms, the effect of a VAT on the firm's accounting function was assessed. The researcher noted each change likely to be required and determined the action that a firm would have to take to bring about that change. He estimated the cost, in dollars, of each of these actions and categorized these costs as initial compliance costs or as continuing ones. The study also con- siders models that would allow a firm to estimate its total initial compliance cost and its total continuing compliance cost without study- ing the components of those costs in detail and estimating each of them. The study concludes by summarizing and stating the implications of the study including suggesting areas of further research. General Description of a Value-Added Tax Types of Value-Added Taxes The value-added tax is a tax "imposed on the value that a business firm adds to the goods and services it purchases from other ll.I firms. There are three types of value-added tax. The main distinguish- ing characteristic of each type is its treatment of capital outlays. A succinct description of each has been given by Robert Statham: Under the "gross product" type of value-added tax, there is no provision for a deduction of the cost of capital outlays, nor is there provision made for the depreciation of such items. . . . Under the "income" type, provision is made for the deduction of the cost of capital investments through the use of depreciation. . . . lCarl s. Shoup, Public Finance (Chicago: Aldine Publishing Co., 1969), p. 251. F Under the "consumption" type of value-added tax, provision is made for the full deduction of capital outlays in the year they are purchased. The particular type of VAT could affect a firm's decision to invest in capital equipment. With a “gross product" type there is no reduction in the VAT paid to the government as a result of a capital investment, while with the "income" type there is a reduction in VAT paid over some period, and with the “consumption" type the reduction occurs in the year of purchase. Methods of Computing the Value-Added Tax The tax may be computed by either the additive or subtractive nethod. Alan Tait describes the subtractive method as "...value added (V/A), equals total output (0), minus total input (I) of purchases....”3 Tait continues, "...the difference between output and the inputs of... [purchases]..., is the payments of wages and salaries (W), and the re- 4 sidual, which we will call profit (P).“ Thus, 0 - I = W + P. The summation of the payments to the factors of production to determine the 5 value added, V/A = W + P, is called the additive method. The amount of 2Robert R. Statham, "The Value Added Tax—-What it is and How it Works," mimeographed (Washington, D.C.: Taxation Committee, Chamber of Commerce of the United States, 22 February 1972), p. 7. 3A1an A. Tait, Value Added Tax (London: McGraw-Hill, 1972), p. 4Tait, Value Added Tax, p. 2. 5Described by Clara Sullivan, “The addition approach consists of adding various bookkeeping items, specifically the payments made by the firm to the factors of production employed in turning out the pro- duct, such as wages, interest, rent, royalties, and profits." Clara K. Sullivan, The Tax on Value Added (New York: Columbia University Press, 965 . p. 7. 2. -y ‘.-u———- . value added is the same whether computed by the additive or subtractive method. W + P = V/A = O - I The total value-added tax (V/AT) can be determined in the following six ways:6 where: t = the tax rate or rates W, P, O, and I = individual transactions for wages, profit, output (sales), and input (purchases), respectively 2 = summation of direct additive method (1) V/AT (2) V/AT t(£W+2P) tzW+tzP 11 direct subtractive method (1) V/AT (2) V/AT t (X 0 - Z I) t Z 0 - t Z I indirect additive method V/AT = Z tW + Z tP indirect subtractive method V/AT = 2 t0 - 2 t1 6Tait in his presentation of the direct and indirect methods omits summation signs. See Tait, Value Added Tax, pp. 3-4. For example, his indirect subtractive method appears as = t0 - tI. In attempting to apply this to an individual firm with numerous sales and purchases, it is unclear whether the amount of the individual sales should be summed and the tax calculated on the total or whether the tax should be calcu- lated on each individual sale and the amount of the tax summed. A similar confusion exists concerning purchases. With the direct additive or the direct subtractive (sometimes called "sales-or cost-subtraction method"7 and "net turnover tax with prior turnover deduction"8) methods a firm's VAT liability would be the firm's total value added times the VAT rate or the VAT rate could be applied to each component used in determining the total amount of value added by the firm. It would thus be possible to tax each component at a different VAT rate. Using either the direct additive or direct sub- tractive methods, a firm's VAT liability can be determined from its ledger accounts.9 No VAT computations have to be made with regard to individual invoices and no change in the firm's invoicing process is required in order to determine the VAT owed. Using the indirect additive method, a firm's VAT liability would be the summation of the VAT applicable to each individual payment to the factors of production (wages, interest, rent, royalties, and profits). Using the indirect subtractive method (sometimes called "tax 1 II 0 11) credit" and "prior tax deduction the VAT rate is applied to each of the firm's sales and the amount of VAT is determined. The individual amounts are summed to determine the tentative tax. The VAT applicable- 7Sullivan, The Tax on Value Added, p. 7. 8Walter Missorten, "Some Problems in Implementing a Tax on Value-Added," National Tax Journal, 21 (December 1968): 388. 9This'is demonstrated in Sullivan, The Tax on Value Added, pp. 204-12, and Table l of this study. 10Sullivan, The Tax on Value Added, pp. 7-8. nTait, Value Added Tax, p. 4. to each of the firm's purchases is also summed. The firm's VAT liability is the total VAT collected on sales less the total amount of VAT paid to firms that have sold goods and services to the firm in question. Tait indicates that the direct methods are sometimes called the "accounts method" and the indirect methods are sometimes called the "invoice method."12 With the direct methods the amounts of wages or sales, for example, are taken from the invoices and accumulated in the ledger accounts of the firm in the usual fashion. Periodically the VAT rate is applied to the ledger account balances to determine the VAT liability. Thus the firm's VAT liability is determined by reference to the ledger accounts of the firm. With the indirect methods the amount of the VAT must be determined for each transaction and shown on the in- voice for that transaction. The amounts of VAT applicable to each transaction are accumulated in the firm's ledger. Thus the firm's VAT liability is determined by reference to the invoices of the firm. There are, of course, various possible combinations of the direct and indirect methods and this leads to ambiguous terminology. For example, when Shoup describes the "tax credit" method he applies the VAT rate to the firm's total sales (t Z 0), but for purchases he 13 sums the VAT on each transaction (2 t1). The "tax credit" method that has gained wide acceptance, particularly in Europe, is the in- 14 direct subtractive method described above and by Sullivan, the sum 12Tait, Value Added Tax, p. 4. 13Shoup, Public Finance, p. 258. 14Sullivan, The Tax on Value Added, pp. 7-10. of the VAT on individual sales less the sum of the VAT on individual purchases (2 t0 - 2 t1). The three types of value—added tax (gross product, income, and consumption), the direct additive and direct subtractive methods of computing the tax, and the base(s) to which the value-added tax rate(s) could be applied, are shown in the following example: assume that a firm purchases a capital asset having a two-year life for $40; then assume that for each of two years: the firm's sales total $100; its purchases (excluding capital assets) from other firms total $35 and all of these purchases were resold (to avoid any problem with in- ventories); and its payroll totalled $30; also assume that there is a single VAT rate of 4%. This example is illustrated in Table l.15 The accounting profit each year would be 15 (sales of 100 - purchases of 35 - payroll of 30 - depreciation of 40 + 2). The firm's VAT liability in year 1 for an "income" type of VAT under the direct additive and direct subtractive methods as follows: direct additive method (1) V/AT = t(2 w + 2 P) = .04 (30 + 15) = 1.8 (2) V/AT = t z w + t 2 P = .04 (30) + .04 (15) = 1.8 direct subtractive method (1) V/AT = t(Z O - 2 I) = .04 (100 - 35 - 20) = 1.8 (2) V/AT = t Z O - t Z I = .04 (100) - .04 (35) - .04 (120) = 1.8 15For a fuller discussion of the types of value-added taxes and the methods of computing them,see Tait, Value Added Tax, pp. 2-4, Shoup, Public Finance, pp. 250-6l, and particularly Sullivan, Tax on Value Added, Chapter 5. Table 1. Calculation of the Value-Added or VAT Base(s) to Which the VAT Rate(s) Could be Applied for the Direct Additive and Direct Subtractive Methods. Direct Direct Sub- Additive tractive TYPE OF VAT Method Method of of Comput- Computing ing the VAT the VAT Year 1 Year 2 Year 1 Year 2 "Gross product" 1 Payroll 30 30 Sales 100 100 Profit 15 15 Less Purchases 35 35 Depreciation g9_ g9_ ____ ____ Value Added 65 65 Value Added 65 65 "Income" Payroll 3O 30 Sales 100 100 Profit 15 15 Less Purchases 35 35 ___ ___ Less Depreciation _gg; _jfl; Value Added 45 45 Value Added 45 45 "Consumption” FPayroll 3O 30 Sales 100 100 Profit 15 15 Less Purchases 35 35 Depreciation 20 20 Less Capital Outlay 4O 0 Less Capital Outlay 40 __O_ __ __ Value Added 25 6 Value Added 25 65 An example showing the three types of value-added tax and the indirect additive and indirect subtractive methods requires the follow— ing additional assumptions: the sales consist of a transaction of 60 and one of 40; purchases (excluding capital assets) consist of a trans- action of 20 and one of 15; payroll consists of a transaction of 20 and one of 10; and the 40 purchase of the capital asset, 20 yearly deprecia- tion, and the 15 profit were each single transactions. Table 2 shows the accumulation of the VAT that would have been computed for each transaction. Table 2. Calculation of the Value-Added Tax for the Indirect Additive and Indirect Subtractive Methods Indirect Indirect Additive Subtractive TYPE OF VAT Method of Method of Computing Computing the VAT the VAT Year 1 Year 2 Year 1 Year 2 "Grossgproduct“ Payroll .8 .8 Sale 2.4 2.4 Payroll .4 .4 Sale 1.6 1.6 Profit .6 .6 Less Purchase .8 .8 Depreciation _;§_ ._;§ Less Purchase _;6_ _46. Tax Due 2.6 2.6 Tax Due 2.6 2.6 "Income” Payroll .8 .8 Sale 2.4 2.4 Payroll .4 .4 Sale 1.6 1.6 Profit .6 .6 Less Purchase .8 .8 Less Purchase .6 .6 __ __ Less Depreciation __.__8 __.__8 Tax Due 1.8 1.8 Tax Due 1.8 1.8 “Consumption" Payroll .8 .8 Sale 2.4 2.4 Payroll .4 .4 Sale 1.6 1.6 Profit .6 .6 Less Purchase .8 .8 Depreciation .8 .8 Less Purchase .6 .6 Less Capital Outlay 146_ __11 Less Capital Outlay 1,6_ __51 Tax Due 1.0 .6 Tax Due 1.0 2.6 The firm's VAT liability in Year 1 for an “income" type of VAT under the indirect additive and indirect subtractive methods is as follows: indirect additive method V/AT = tW + tP = .04 (20) + .04 (10) + .04 (15) = 1.8 10 indirect subtractive method V/AT = t0 - t1 = .04 (60) + .04 (40) - .04 (20)- .04 (15) - .04 (20) = 1.8 In taxation literature, the indirect subtractive method ("tax credit" method) is frequently presented in a different form to emphasize the flow of goods from one firm to the next in the production process. This other form may be seen in Table 3 for the consumption type of VAT. In Table 3 it is assumed that Firm 8 produces goods from "thin air" and sells them to Firm A, that the VAT rate is 4% and that the data assumed in Tables 1 and 2 applies to Firm A. The amounts shown for Firm A re- present the summation of the following individual transactions: sale of 60+VAT of 2.4 and sale of 40+VAT of 1.6; purchase of 20+VAT of .8 and purchase of 15+VAT of .6; and capital outlay of 40+VAT of 1.6. While Table 3 represents the indirect subtractive method (2 t0 - 2 t1) it is very similar to one that would represent the direct subtractive method (t Z O - t Z I). Were the description "on which VAT was paid“ dropped from the purchases title, Table 3 would represent the direct subtractive method applied to a consumption type of VAT. Fre- quently authors use a table such as Table 3 to illustrate the tax credit method and label the purchases simply as purchases from other firms.16 Confusion as to how an individual firm would determine its VAT liability would be reduced if authors stated whether it was by the direct subtractive . 16For example, see Cambridge Research Institute, Prepared for Amer1can Retail Federation, The Value-Added Tax in the United States-- Its Impl1cations for Retailers (Cambridge, Mass.: Cambridge Research Institute, 1970), pp. 17-9. 11 method and the firm referred to their accounts or whether it was the indirect subtractive method and the firm referred to their invoices. Table 3. Calculation of the Value-Added Tax: Indirect Subtractive Method Applied to a Consumption Type of VAT (Alternative Form of Presentation). Year 1 Amount Total Amt. Exclusive + VAT = Paid or of VAT Collected Firm A Sales 100 + 4 = 104 Less Purchases from other firms on which VAT was paid _15_ + 3_ = _18_ Equals Value added 25 Equals VAT due government 1 Firm 8 Sales 75 + 3 = 78 Less Purchases from other firms on which VAT was paid _9_ + g_ = _Q. Equals Value Added 75 Equals VAT due government 3 Classification of a Value-Added Tax as a Sales Tax Confusion over the classification of a VAT has brought about errors in estimating its effects and has thus generated undue criticism of such taxes. The imprecise classification of a VAT becomes important . . 12 when statements are made indicating either the amount of VAT that would l7 18 be passed on to the consumer or the degree of regressivity of the VAT. The confusion seems to arise from a failure to distinguish among different types of sales taxes, methods of computing the VAT, and types of VAT. For instance, J. Boddewyn and others say that a VAT is or "is essentially" a sales tax differing only in method of collection.19 Paul Samuelson and others say that the VAT is a tax on consumption ex- 20 penditures collected in installments. Unless it is assumed that all sales taxes are taxes on consumption, these two statements cannot be reconciled. The AFL-CIO and others state that a VAT is or "is essentially" 21 a retail sales tax. This is countered by Richard Lindholm, "The only 17Hugh Scott, "President vs. Congress-~The Outlook Now: Inter- view with Hugh Scott, Republican Leader in the Senate," U.S. News & World Report, 28 February 1972, p. 33. 18Edwin L. Dale, Jr., "Nixon Weighing Revenue Sharing Linked to 'Value Added' Tax," New Yorvaimes, 21 December 1970, p. 17. 19J. Boddewyn, "Readers Report-~Defining Value Added," Business Week, 8 April 1972, p. 5; Commission of the European Communities, Memo- randum Concerning Border Tax Adjustments (Brussels: European Economic Community, 2 April 1969), p. 6; and Mel Krauss and Richard M. Bird, "The Value Added Tax: Critique of a Review," Journal of Economic Literature, 9 (December 1971): 1167. 20Paul A. Samuelson, "The Value-Added Tax," Newsweek, 6 March 1972, p. 63; and National Economic Development Office, Value Added Tax: A Report by the National Economic Development Office, 2d. ed. (London: Her Majesty's Stationary Office, 1971), pI'9. 2IAFLa-CIO Legislative Department, "The Value—Added Tax--A National Sales Tax," 1972 Fact Sheet No. 2, mimeographed (Washington, D.C.: AFL-CIO,1972), as reported in Statham, VAT, p. 5, J. Russell Boner, "Miracle Levy Goes Awry," Wall Street Journal, 14 October 1969, p. 38, James A. Papke, "Discussion," National Tax Journal, 24 (September 1971): 415; and Stanley S. Surry, ”Value-Added Tax: The Case Against," Harvard Business Review, 48 (November-December 1970): 86. 13 similarity that a VAT has to a retail sales tax is that under both taxes n22 tax liability develops when a sale takes place. In contrast to the above-mentioned authors, Carl Shoup categorizes taxes as broadly based (e.g., general sales tax or income tax) and narrowly based (e.g., commo- dity tax).23 He further subdivides the general sales tax into the follow- ing five types: the turnover tax, the manufacturers' sales tax, the whole- 24 sale sales tax, the retail sales tax, and the value-added tax. Moreover, he specifies one type of VAT, the consumption type, when he discusses in- 25 cidence. Most other writers, however, fail to identify the type of VAT 26 or its method of computation. The VAT should be classified as a general 22Richard A. Lindholm, "The Value Added Tax: Rejoinder to a Critique," Journal of Economic Literature, 9 (December 1971): 1175. 23Shoup, Public Finance, pp. 7, 9. 24Shoup in Publichinance describes each as follows: turnover tax - a tax on "all transfers for a consideration in the production and distribution of goods and services" (P- 208); manufacturers' sales tax - a tax on "the value of the commodity as it leaves the last manufacturing firm to process it" (P- 234); wholesalers' sales tax - a tax on sales by those (wholesalers and manufacturers) who sell directly to retailers and on manufacturers who sell directly to consumers (p. 241); retail sales tax - a tax on "consumer purchases of goods and services" (p. 244); and value-added tax - a tax on "the value that a business firm adds to the goods and services that it purchases from other firms" (P- 251)- 25Shoup, Public Finance, pp. 207, 212-8, 236, 242, 244-5, 264-5. 26For example, the references cited in footnotes 19-22 above do not indicate both the type and method of computing the VAT to which they refer. 14 sales tax for without positive sales the firm would not have positive value added on which to levy the VAT.27 Comparisons of a VAT with a sales tax would be more valid if both the type and method of computing the VAT were specified as well as the type of general sales tax with which the VAT is being compared. For example, the tax incidence of a consumption type of VAT computed using the indirect subtractive method may be considerably different from that of a gross product type of VAT computed using the direct additive method, and both may be different from a wholesale sales tax or a retail sales tax. Thus, not all criticism of the VAT as a sales tax is valid, as a comparison of two unspecified items does not yield useful results. Background Concerning the Proposal and Adoption of ' Value-Added Taxes Since a substantial literature exists concerning value-added taxes, this section aims to provide only a brief survey of the background 27With the subtractive method of computing the VAT the value added (V/A) = output (0) or sales — input (I) or purchases from other firms. With the additive method V/A== wages (W) + profits (P). Sub- stituting, W + P = O — I. Rearranging P = 0 - I - W. The value for sales (0) can be positive, zero, or negative (meaning sales returns ex- ceed sales, an unusual occurrence). The value for expenses (1 or W) can be larger than sales, the same size, or smaller than sales. It would be unusual for expenses to be negative (meaning purchase returns exceed purchases). Of the nine possible combinations of sales and ex- Penses the three involving negative sales and the one with sales equal zero and expenses less than zero are unusual. If sales equal zero or are positive and expenses equal sales, the value added equals zero. If sales equal zero or are positive and expenses are larger than sales, then the firm has negative value added. Only if the firm has positive sales in an amount exceeding the expenses does the firm have positive value :fided. Positive amounts of sales are thus essential for the levying of e VAT. 15 28 of such taxation in Europe and the United States. The VAT was proposed for at least thirty-five years before it was first adopted by any govern- ment. In the U.S., it was first proposed in 1921 by Thomas Adams, who is thought to have been influenced by Carl von Siemens of Germany. Siemens 29 proposed the use of a VAT in 1918. Senators Reed Smoot and J. C. O'Mahoney proposed federal VAT legislation in 1921 and 1940, respectively.30 In 1932 the Brookings Institution recommended a VAT for the State of Alabama.31 In 1949 the Shoup Mission recommended the adoption of this form of tax by Japan. The Japanese Diet passed legislation for a VAT but it was never put 32 into effect. In the 1950's the VAT was adopted in both Europe and the United States. In 1953, Michigan adopted a modified form, which was called 1* 28Chamber of Commerce of the United States, "Value Added Taxation Bibliography," mimeographed (Washington, D.C.: Chamber of Commerce of the United States, 1972), pp. 1-26; Tax Foundation, Incorporated, "Research Bibliography Number 45-—Value Added Taxes," mimeographed (New York: Tax Foundation, January 1971), pp. 1-9; and Jeanne-Louise Haviland, compiler, "References on Value-Added Taxation," Tax Policy, 39 (March-April 1972 and October-November~December 1972): 1-12, 135-8. 29John F. Due, "Value-Added Tax Proposals in the United States," Public Finance and Welfare: Essays in Honor of C. Ward Macy, edited by Paul L. Kleinsorge (Eugene: University Of Oregon Books, 1966), pp. 112-3. 30Due, “VAT Proposals," p. 114; and Richard W. Lindholm, "The Value Added Tax: A Short Review of the Literature," Journal of Economic Literature, 8 (December 1970): 1178. I F 3lDue, “Vat Proposals," p. 116. 32 For a fuller discussion see Sullivan, Tax on Value_Added, Chapter 3. 16 the Business Activities Tax.33 4 France adopted a consumption type of VAT in 1954.3 During the next few years the VAT was discussed and considered by other governments but was not adopted by any of them.35 A major event occurred in 1967 when the Council of the European Economic Community adopted the First Directive of the Council, which stated: "The Member States are to replace their present system of turnover taxation by the common system of tax on value added defined in Article 2.“36 Since the Directive, France has simplified its VAT system. Numerous other countries, both members and non—members of the European Economic Community. have a VAT. These countries include Belgium, Denmark, Germany, Italy, Luxem- bourg, the Netherlands, Norway, and Sweden.37 Special committees on 33Michigan, Public Acts of 1953, Act No. 150. For an extensive treatment of the Michigan experience, see: Robert D. Ebel, "Value Added Taxa- tion in the Subnational Economy: An Empirical Analysis and Evaluation,“ (Ph.D. diss., Purdue University, 1971); Robert D. Ebel, "The Michigan Business Activities (Value Added) Tax: A Retrospective Analysis and Evalu- ation," Proceedings ofthe Sixty-First Annual Conference on Taxation (Columbus: Natibnal Tax Association, 1969), pp. 90-107; JamesfiAZFPapke, "Michigan's Value Added Tax After Seven Years,“ National Tax Journal, 13 (December 1960): 350-63; and James A. Papke, "The Theory'and PraETTEe of Value Added Taxation," (Ph.D. diss., Cornell University, 1959). Robert Ebel's dissertation, with some changes, has been published as The Michi an Business Activities Tax (East Lansing: Michigan State University, 1972). 34Sullivan, Tax on Value Added, p. 75. 35Cambridge Research Institute, VAT, p. 28. 36Council of the European Economic Community, "First Directive of the Council of 11 April 1967," European Taxation 3 (November-December 1969): 299-300. ‘ 37For a discussion of experience with a VAT in Europe, see: Cam- bridge Research Institute, VAT, Chapter 4: Edwin S. Cohen, "Treasury Says European Experience with VaTUE'Added Tax is Favorable,“ Journal of Taxation 35 (November 1971): 316-8; National Economic Development DTTice, VAT: Report, A 17 taxation in Canada, the United Kingdom, and the United States all recommended against the adoption of a VAT,38 39 although the United Kingdom has since re- placed two taxes with it. In the United States, it has proven much more difficult for a VAT to be accepted. Michigan repealed its Business Activities Tax in 1967 and f Chapter 4, Maurice E. Peloubet, "European Experience with Value- Added Taxa- tion," Alternatives to Present Federal Taxes, Tax Institute of America (Princeton, N. J. Tax Institute of America, 1964), pp. 64- 75, Stanley S. Surry, "Implications of Tax Harmonization in the European Common Market," Conference Board Record, 5 (April 1968): 14-9; and Alfred Zanker, "Europe's Value-Added Tax: Model for U. S. ?" U. S. News & World Report, 6 March 1972, pp. 75- 7. In France, see: Cambridge Research Inst1tute, VAT, Appendix B; Georges Egret, "The Value-Added Tax in France," Value Added Tax: The U. K. Position and the European Experience, Edited by T. M. 'Rybczynski (Oxford: Basil Blackwell, 1969), pp. 20- 9, Francesco Forte, ”On the Feasibility of a Truly General Value Added Tax: Some Reflections on the French Experience, National Tax Journal, 19 (December 1966): 337- 61; Richard W. Lindholm, “The French Value-Added Tax," Oregon Business Review, 27 (February 1968): 1-4; and Sullivan, Tax on Value Added, Chapter 2. In Germany, see: Cam- bridge Research Institute, VAI_, Appendix C; "Value-Added Tax--Is it Blessing or Bane?" Management Accounting (London) 49 (August 1971): 235-7; and Man- fred Schirm, The Value-Added Tax in Germany,“ Value Added Tax: The U.K. Position and the European Experience, edited by T. M. Rybczynski (Oxford: BasiT’Blackwell, l969),fipp. 30-43. In Sweden and Denmark, see: Carl S. Shoup, "Experience with the Value-Added Tax in Denmark, and Prospects in Sweden," Finanzarchiv, 28 (March 1969): 226- 52, and Martin Norr and Nils Hornhammar, "The Value-Added Tax in Sweden," Columbia Law Review, 70 (March 1970): 379- 422. 38Committee on Turnover Taxation (Richardson Committee), Report of the Committee on Turnover Taxation, Cmnd 230013 ondon: Her Majesty' s Stationary Office, 1964), p. 84, President's Task Force on Business Taxa- tion, Report of the President's Task Force on Business Taxation (Washington, D. C: Government Printing Office, 1970), p. 61'; and'Royal Commission on Taxation (Carter Commission), Report of the Royal Commission on Taxation, vol. 5 (Ottawa: Queen's Printer, 1966), p. 50. 39United Kingdom, Chancellor of the Exchequer, Value Added Tax, white paper (London: Her Majesty's Stationary Office, 1972), 18 40 replaced it with a corporate and personal net income tax. After con- sidering and rejecting a VAT in 1967, the West Virginia legislature passed a VAT in 1970, only to have the tax vetoed by the Governor.41 In 1971, another VAT died in the Minnesota legislature.42 On the United States federal level, however. a VAT has been under consideration at least since early 1970.43 President Nixon spoke 44 about considering it in January 1971. In 1972 there was considerable interest in a VAT including Congressional Hearings.45 A possible VAT proposal was said to be under consideration with a few of the details being: The rate of the tax would be 2-1/2 or 3 percent. It would be paid at every step of the manufacturing and distribution process on all products and nearly all services. (The tax plan) would provide rebates of at least part of the tax not only to poor families but also to others, ranging well into the upper-middle income category--gor example, a family of four with an income of $20,000 a year.4 v 40Michigan, Public Acts of 1967, Act No. 281. 4lCambridge Research Institute, VAT, p. 28. 423. Kenneth Sanden,“The Value Added Tax: Its Application and Practice," Proceedings of the Sixty-Fourth Annual Conferencefion Taxation (Columbus: National Tax Association,71972), p. 123. ' ' 43"0n the Prowl for New Taxes," Business Week. 3 January 1970, P- 12- 44Richard M. Nixon, "Transcript of Four Correspondents Interview with President at the White House," New York Times, 5 January 1971, p. 20. 45U.S. Congress, Joint Economic Committee, Hearings before the Joint Exonomic Committee, The Value-Added Tax (Washington, D.C.: Government F’rinting Office, 1972) and’Tax InstitUte of America, "A Value Added Tax - Symposium," Tax Policy, 39 (October-November-December 1972). 46Eileen Shanahan, "Nixon's Tax Plan Includes Rebates to Most Families, gigaw York Times, 6 February 1972, p. 1. 19 As of June 1972, however, Gerald Brannon, Acting Director, Office of Tax Analysis, The Department of the Treasury, stated, "I also would like to stress that the Treasury does not have a specific value added tax pro- .47 posal.‘ During the summer of 1972 various polls reported that people were not in favor of a VAT as a means of reducing local property taxes.48 From that time to the present (March 1974) virtually no mention has been made of a federal VAT. One group, the Institute for the Future, however, has estimated a 40% probability that a modest (3%) value-added tax will be passed by 1985.49 Current Pressure for a Value-Added Tax in the United States The need and desirability of a VAT, particularly at the federal level, received considerable attention in the U.S. from 1966 to 1972. Perhaps __v' ,47Gerard M. Brannon, letter to the author dated June 23, 1972. 48A Gallup poll of 1614 adults reported 51% against a national sales tax or a VAT as a means of relieving property taxes; 34% were for the tax; and 15% had no opinion (New York Times, 27 August 1972, p. 20). Over 11,500 replies to a questionnaire of a Congressman from Massachusetts showed 57% did not, "...support the concept of a value-added tax (national sales tax) as a partial substitute for local property taxes," while 43% did (Washington Newsline by Congressman Silvio 0. Conte, July 1972, p. 2). The PreSident's Advisory Commission on Intergovernmental Relations was against a VAT (New York Times, 15 December 1972, p. 36) as was the National Governor's Conference (New York Times, 8 June 1972, p. 23), the Platform Committee of the Democratic National Convention (New York Times, 29 June 1972, p. 29) and a poll of persons on the Republican National Committee's nmiling list (New York Times, 25 July 1972. P. 18). 19 49“A Think Tank That Helps Companies Plan," Business Week, 25 August 73. p'. 70. . 20 the most frequently mentioned reason for adopting a VAT is that it would improve the U.S. balance of trade, since a VAT on exports may be re- mitted whereas most other taxes may not be. The General Agreement on Tariffs and Trade (GATT) prohibits export subsidies to industrial and commercial enterprises in the form of the remission of direct taxes or social welfare charges, but a VAT (as well as a single stage retail 50 Thus a VAT can stimu- sales tax) is excluded from all prohibitions. late exports to the extent that it replaces other taxes that cannot be remitted. If the VAT replaces a tax, imports would tend to be discouraged as the price of the domestic goods need not include an amount for the re- placed tax while imports would continue to include an amount for the taxes of the foreign country as well as the added VAT. The significance of such stimulation would depend, however, on the rate of the VAT,51 as well as on other factors. While Norman Ture states that the substitution of a VAT for the corporate income tax would result in "quite limited" short run effects on the balance of trade, Maurice Weinrobe concludes that the same substitution would result in "a substantial improvement in the balance of trade."52 50General Agreement on Tariffs and Trade, Analytical Index 3rd rev. (Geneva: Contracting Parties to the General Agreement on Tariffs, 1970), Article XVI. 5ISurry, "VAT: Case Against," p. 92. 52Maurice D. Weinrobe, "Corporate Taxes and the United States Balance Of'Trade," National Tax Journal, 24 (March 1971): 85. Norman B. Ture, 48th Annual Re ort} National Bureau of Economic Research, Inc. (New York: National Bureau of Economic Research, 1968), p. 52, and this was based on National Bureau of Economic Research and the Brookings Institution, The .BQJe of Direct and Indirect Taxes in the Federal Revenue System (Princeton, N.J.: Princeton University Press,'1964)T For a discussion of value-added 21 A second reason often given for adopting a federal VAT is that it could felicitously reduce the corporate income tax (CIT). The Committee for Economic Development as well as others have endorsed 53 such a replacement of some of the CIT. It has been said that a VAT of 2 to 5 percent would permit the CIT to be reduced 8 to 28 percent- 54 age points. A reduced CIT would reduce the amount of pretax profits required for a firm to achieve the same after tax return on a capital 55 investment. This would make capital investment more attractive for taxes and U.S. international trade, see: Gordon T. Butler, "The Value- Added Tax: A New $40 Billion Tax for the United States?" Texas Law Review, 50 (January 1972): 267-311; Tax Foundation, Inc., Tax Harmoni- zation in Europe and U.S. Business (New York: Tax Foundation, 1968); CharleshE. McLure, or: and Norman B. Ture, Value Added Tax: Two Views Washington, D.C.: American Enterprise Institute for Public Policy’ Research, 1972); and Francis Joseph Pettit, "Effects on Selected Steel Imports of Substitution of a Value-Added Tax for the Corporation In- come Tax," (D.B.A. diss., George Washington University, 1970). 53Committee for Economic Development, A Better Balance in Federal Taxes on Business (New York: Committee for Economic Develop- ment, 1966), p. 10; James D. Phyfe, "The Case for Replacing the Corporation Income Tax with a Value-Added Tax," Public and Inter- national Affairs, 5 (Spring 1967): 189; Richard W. Lindholm, "Value Added Tax vs. Corporation Income Tax," Business Economics 5 (January 1970): 62; Maurice E. Peloubet, "Statement," Federal Excise Tax Structure, U.S. Congress, House Committee on Ways and Means, Hear- ings before the Committee on Ways and Means (Washington, D.C.: Govern- ment Printing Office, 1964), p. 1271; Dan Throop Smith, "The Value Added Tax as an Alternative to the Corporate Income Tax," Proceedings gfgthe Fifty-Seventh Annual Conference on Taxation (Harrisburg: National TaxiAssociation, 1965), p. 460; and Dan Throop Smith, "Capital Forma- gion and the Use of Capital," American Economic Review, 53 (May 1963): 18. 7 54President's Task Force on Business Taxation. R820? 3 P. 55~ 55Norman B. Ture, "Economic Aspects of a United States VAT," Tax Policy, 39 (October-November-December 1972): 37-8 and Shoup, Egblig Finance, Pp. 298-302. 22 corporations, and this would stimulate the economy.56 With higher profits the corporations would tend to pay higher cash dividends thus affecting stock prices.57 The VAT, in contrast to the CIT, is often described as a neutral tax. The CIT lacks neutrality in respect to form of ownership (corporation vs. proprietorship), financing (debt vs. equity), and efficiency (profitable vs. unprofitable firms).58 Stanley Surry attacks the VAT's neutrality by arguing that business simply collects the VAT; the incidence of the tax falls entirely on the consumer. Therefore, the neutrality of the tax towards business is irrelevant to the question of the neutrality of the tax to- ward taxpayers.59 Another reason for adopting a federal VAT is that it could substitute for some or all of the payroll taxes used to finance the social security system, since payroll taxes are regressive and tax 60 only a single factor of production, labor. However, this use of a 56Others are less sure about the amount of stimulation the substitution would provide. See John F. Due, "Discussion," National Tax Journal, 24 (September 1971): 418; and Richard E. Slitor, "The Value-Added Tax as an Alternative to Corporate Income Tax," Alterna- tives to Present Federal Taxes, Tax Institute of America (Princeton, N.J.: Tax Institute oflAmerica, 1964), pp. 41-2. 57Joseph A. Pechman, "Fiscal Federalism for the 1970's," National Tax Journal, 24 (September 1971): 281. 58Dan Throop Smith, "Value Added Tax: The Case For," Harvard Business Review, 48 (November-December 1970): 79-80. 59Surry, "VAT: Case Against," p. 89. 60President's Task Force on Business Taxation, Report, pp. 69-70. 23 VAT was rejected in 1970 by the President's Task Force on Business Taxation. Still another reason for adopting a federal VAT is what Arnold Harberger calls "the most important advantage of a value-added tax: its potential as an instrument of flexible fiscal policy."61 Rates of change in the tax could be made easily, would be felt directly throughout the entire economy, and would begin to impact immediately on individual buying decisions. The editor of the Christian Science Monitor has stated that the "most valid argument for the VAT is to raise additional revenues 62 at the federal level." Edwin Dale feels that our means of raising large amounts of revenue are so depleted that the VAT may be “the 63 last practicable means" of doing this. With no reduced rates, exemptions, or rebates, it has been estimated that each percentage 6lArnold C. Harberger, "A Federal Tax on Value-Added," Ih§_ Taxpayer's Stake in Tax Reform, compiled by the Chamber of Commerce of the United States (Washington, D.C.: Chamber of Commerce of the United States, 1968), p. 28, and Arnold Harberger, "Statement on the Value Added Tax," Tax Changes for Shortrun Stabilization, U.S., Congress, Joint Economic Committee, Hearings Before the Subcommittee on Fiscal Policy of the Joint Economic Committee (Washington, D.C.: Government Printing Office, 1966). Pp. 66-9. Henry c. Wallich ("The Brewing Interest in VAT," Fortune, 83 (April 1971: 115) indicates that a VAT could be used as an income stabilizer. 62Editorial, "A Way to Fund Revenue Sharing?" Christian Science Monitor, 2 March 1971. 63Dale, "Nixon Weighing Revenue Sharing," p. 17. 24 64 With reduced point of VAT rate would yield $6 billion in revenue. VAT rates for food and exemptions for charity, or tax rebates to low income persons, each percentage point of VAT rate would yield approx- imately $4 bi11ion.65 By comparison, increasing all personal income tax rates 10% would yield $9 billion.66 Expenditures that have been cited as requiring additional revenue are "galloping federal spending,“ paying "the cost of new incentives for business investment," and revenue sharing with the states for property tax relief and school financing.67 In summary, the reasons that have been given for adopting a federal VAT include the improvement that a VAT WOU1d effect in the balance of trade, the reduction of corporation income and payroll 64Cambridge Research Institute, VAT, pp. 74-7; and Shanahan, "Nixon's Tax Plan," p. 1. Using 1972 dataj-Allen Sinai indicates $7.8 billion per percentage point of VAT rate (U.S., Congress, The Value- Added Tax, p. 133). For comparison, 1971 Federal budget receipts in biilions of dollars totalled 188, with individual income taxes 86, corporation income taxes 27, employment taxes and contributions 42, excise taxes 17, unemployment taxes 4, estate and gift taxes 4, customs duties 3, contributions for other insurance and retirement 3, miscell- aneous (and rounding) 2 (Richard M. Nixon, Economic Report of the President (Washington, D.C.: Government Printing Office, 1972), p. 271.) 65Cambridge Research Institute, VAT, p. 76 and the Brookings Institution, New York Times, 25 May 1972, p. III-3. 66American Bar Association, A Report of a Subcommittee of the .Special Committee on Value-Added Tax, "Should the United States adopt the'Value-Added Tax? - A Survey of the Policy Considerations and the Data Base," ax Lawye , 26 (Fall 1972): 52. 67"Newsgram," U.S. News 8 World Report, 3 April 1972, p. 10; "How to Revive Capital Spending," Business Week, 22 August 1970, p. 58; anci "Shultz Confirms 'Value-Added Tax' Studied as Means to Avert School Financing Crisis," Wall Street Journal (Midwest), 7 January 1972, p. 3. D.‘ II, ..iE' ( 1» A1 Iv- v 0‘ III (_I. f”! 'F on. 25 taxes, the use of the VAT as an instrument of fiscal policy, and the power of the VAT to raise additional revenues. Criticism of a federal VAT has been made by numerous people.68 Much of the criticism is that it is regressive.69 Occasionally mentioned is that a federal VAT invades the sales taxation field, a fi aid that traditionally has been left to state and local governments.70 - One of the reasons that a former governor of North Carolina '1 5 against a federal VAT is “...I do not believe the national system of appropriations and budget management can be trusted to allocate wisely the...[monies that]...cou1d be raised from this last great source of New public revenue."7] Some criticism of a VAT seems to stem only 68AFL-CIO Legislative Department, "VAT," p. 5; Samuelson, "VAT," p. 63; Surry, "VAT: Case Against," p. 94. Others critical of a Federal VAT include: Senators Russell Long (0. La.), George McGovern (D. So. Dak.), and Henry Jackson (0. Wash.) in Raymond Lahr, "Nixon Seeks Full Study of Value-Added Tax Impact," Herald Traveler (Boston), " February 1972; Senator Fred Harris (0. Okla.) in James M. Naughton, Connally Tells Senators Nixon Seeks Tax Reform," New York Times, 29 anuary 1971, p. 12; Senator Edmund Muskie (D. Maine) and Joseph pechman (Brookings Institution) in "The Simnering VAT," Time, 28 Febru- ary 1972, p. 20; Senator William Proxmire (D. Wis.) in "Proxmire Glares at Any Value-Added Tax: Vows Searching, Critical Look by Panel," Wall wet Journal (Midwest), 13 January 1972, p. 2; and the American Eideration of Teachers and the Communication Workers of America in U.S., ()ngress, The Value-Added Tax, pp. 219-21. 69These critics seem to equate a VAT with a retail sales tax a] though they usually do not specify the type nor method of computing ‘1 e VAT to which they refer. Neither do critics mention the possibility 01“ VAT relief provisions for low income people. They evaluate the pro- gressiveness of the VAT alone, rather than the progressiveness of the tax structure as a whole. 70Editorial, "A Way to Fund Revenue Sharing," Christian Science Monitor, 2 March 1971. 71Terry Sanford, "Balancing the Revenues," ax Policy, 39 (October-November-December 1972): 128. aIIAQI ,uv... ’1' ll. ‘ .a ‘I‘ A "i- .1 (‘3‘, ..E ~n ' . 'J1.h 'i 26 from self-interest. Joseph Barr, former Secretary of the Treasury and I1<3vv vice-chairman of American Security and Trust Company, for example, opposes a VAT because "banking is in a favored position with respect to ‘t11ee corporate tax..." and might not receive favorable treatment under ea \hAT.72 Despite the validity of the reasons for adopting a VAT or of the criticisms of a VAT, some people say "the whole issue is a politi- czial one and political considerations will dominate the outcome."73 As was stated in Business Week, "There is no painless tax."74 Pressure for adopting a VAT at the state level exists because ()1: the states' revenue needs. State expenditures are expected to grow.75 (:CJLnts in four states have struck down systems of financing public ele- mentary and secondary education through local property taxation.76 Use 0"= a form of VAT at a state level has been tentatively approved by the GIr‘eater Detroit Chamber of Commerce and by Burns Stanley of the Ford \ 72Joseph W. Barr, "Will the Value-Added lax Solve Our Foreign 'T"rade Problems?" Banking, 61 (May 1969): 44. 73Edward A. Sprague and Lillian W. Kay, "New Federal Revenue 53c:urce?--II," NAM Reports, 24 April 1972, p. 10. 74Editorial, "There is No Painless Tax," Business Week, 26 February 1972, p. 90. 75Pechman, "Fiscal Federalism,“ pp. 281-2. 76"The Coming Change in the Property Tax," Business Week, 12 February 1972, pp. 50-1. Although voters in California, Michigan, Colo- rado, and Oregon voted against sharply limiting the property tax as a Source of funds for public education ("Yes to Tax on Property," New York lines, 12 November 1972, p. IV-7) and the U.S. Supreme Court declined to interfere ("School Taxes: Fair Enough?", Newsweek, 2 April 1973, P. 97) the State Supreme Court rulings of California and Michigan still stand as to the invalidity of school financing by property taxes (News- vygek, 2 April 1973, p. 97). 27 Motor Company, if local business property taxes used for school tax purposes are to be eliminated.77 Brian O'Keefe of the Chrysler Cor- poration opposes a state VAT, however.78 It has been suggested that states drop their sales taxes and piggyback on a proposed federal VAT (consumption type, indirect subtractive method).79 Objection has been raised to this idea, however. With state income taxes moving closer to federal definitions, eliminating state sales taxes for a federal VAT with revenue sharing would further reduce the discretion that state and local taxing authorities could exercise over their fiscal structures.80 Review of Existing_Literature Concerning the Cost to a Firm of Complying with a VAT While the literature on compliance costs of taxes in general provided some assistance to the conduct of this study, little has been 77Greater Detroit Chamber of Commerce, Board of Directors, "Official Policy on the State's Revenue System," mimeographed (Detroit: Greater Detroit Chamber of Commerce, July 6, 1971), pp. 4-5; Burns Stanley, "The Value-Added Tax and Its Effect on Business--Pros and Cons," Speech at CPA State Tax Forum, Detroit, November 8, 1971. 78Brian T. O'Keefe, "The Value Added Tax and Its Effect on Business--Pros and Cons," Speech at CPA State Tax Forum, Detroit, November 8, 1971. 79Richard W. Lindholm, "Integrating a Federal Value Added Tax With State and Local Sales Levies," National Tax Journal, 24 (September 1971): 403-11; and Naughton, "Connally Tells Senators,IT p. 12. 80Papke, "Discussion," p. 414. See also Due, "Discussion," pp. 417-9. \ 0‘5 F1 28 written that is directly applicable to the precise subject matter of the study.81 The literature in value-added taxes usually in- cludes no specific statements quantifying actual or possible com- pliance costs that a firm would incur. This section categorizes the existing literature that discusses VAT compliance costs. To date, the most detailed studies of the actual or estimated cost to a firm of complying with a VAT are those by 82 Phyllis Barker and by the Cambridge Research Institute. The Barker study estimated the compliance costs for six United States 81For studies on compliance costs of taxes in general, see: Aaron K. Neeld "Interim (Final) Report of the Committee on Cost of Taxpayer Compliance and Administration," Proceedings of the Fifty- Third (through Fifty-Eighth)AConference on Taxation (Harrisburg: National Tax Association, 1961-66), pp. 298-9, 402-28, 289-311, 475- 6, 141-2, 369-94; J. L. Fisher, "How Much Does it Cost to Collect Sales Taxes?" Proceedings of the Fifty-Fourth Annual Conference on Taxation (Harrisburg: National Tax Association, 1962), pp. 619-24, 643, 650; Kenneth Stanton Johnston, Corporations' Federal Income Tax Compliance Costs (Columbus: Bureau of Business Research, Ohio State University, 1963); Fred J. Mueller, The Burden of Compliance: A Study of the Nature and Costs of Tax Collections by the Small Business Elam (Seattle: Bureau Of Business Research, University of Washington, 1963); Burkhard StrUmpel, "The Disguised Tax Burden Compliance Costs of German Businessmen and Professionals," National Tax Journal, 19 (March 1966): 70-7; U.S., Congress, House Committee on the Judiciary, Report of the Special Subcommittee on State Taxation of Interstate Commerce, vols.1 and 2--H.R. 1480, 88th Cong. 2nd sess., 1964, and vols. 3 and 4--H.R. 565 and H.R. 952, 89th Cong., lst sess., 1965; Tax Foundation, Inc., State and Local Sales Taxes (New York: Tax Foundation, 1970), pp. 40-2; John H. Wicks and Michael N. Killworth, "Administrative and Compliance Costs of State and Local Taxes," National Tax Journal, 20 (September 1967): 309-15; and James C. Yocum, Retailers' Costs of Sales Tax Collection in Ohio (Columbus: Bureau of Business Research, Ohio §t§teUniversity, 1961). 82Phyllis A. Barker, "The Value-Added Tax - The Cost to the Businessman,“ Journal of Accountancy, 134 (September 1972): 75-9; Phyllis A. Barker, “Letters - Value-Added Tax,“ Journal of Accountancy, 135 (March 1973): 37; and Cambridge Research Institute, Prepared for American Retail Federation, The Value-Added Tax in the United States-- its Implications for Retailersi(Cambridge, Mass.: Cambridge Research Institute, 1970). 29 firms (a portion of the results of which are shown in Table 25). The hypothetical VAT law with which the firms were to comply was described as the indirect subtractive method, having one rate of VAT, and having no sales exempt from the tax. Little else was said about the hypo- thetical law. Thirteen sources of compliance costs were estimated, although the sources of the time estimates of each were not stated. The compliance costs estimated were what this study defines in Chapter II as continuing compliance costs. No dollar estimates were made of what this study defines as initial compliance costs. The results do not permit one to estimate the amount of fixed and variable compliance costs for any of the firms investigated. Neither do they offer assist- ance to a business firm attempting to estimate its compliance costs. The Cambridge Research Institute estimated compliance costs (of retailers) to be 2 to 4 percent of the VAT collected.83 The data for the Cambridge Research Institute study is taken from James Yocum's Retailers' Costs of Sales Tax Collections in Ohio.84 However, the suitability of Yocum's data for estimating VAT compliance costs may be questioned. The Yocum study lists individual cost items, but the figures (e.g., wage rate and time) used in calculating the totals are not indicated. Individual cost items are grouped for re- porting purposes and the compliance cost reported as a percent of tax liability, not in dollar amounts. This makes it necessary to know the tax liability of a firm before one could begin to estimate its compliance Costs. In addition, the Ohio Sales Tax used tax stamps and the costs k 83Cambridge Research Institute, TAT, pp. 12, 137. 84Cambridge Research Institute, VAT, Appendix E. 30 related to them cannot be completely separated from the remaining costs. Indeed, the existence of a relationship between VAT liability and VAT compliance costs should not be assumed necessarily. While the studies by the Cambridge Research Institute and Yocum assist in the identification of possible VAT compliance costs, they are of little assistance in measuring those costs. General Statements concerning the costs due to a VAT abound. These statements range from "substantial increase in the recordkeeping n85 and compliance procedures to "hard to imagine that a VAT could n86 present any really significant problems. While the titles of some articles imply a precise statement of the problems of complying with a VAT, most of these articles do not live up to their titles.87 Some articles do state some of the problems, but no articles calcu- late the cost these problems would engender.88 85Commerce and Industry Association of New York, Inc., Value Added Tax--A Business View (New York: Commerce and Industry Association of New York, 1970), p. 19. 86Smith, “VAT: Case For," p. 74. 87For example, see Earl F. Davis, “The Value-Added Tax: Implications For Accountants," National Public Accountant, 16 (July. 1971): 12-6; and E. C. Stephenson, “The Michigan Business Activities Tax: A Retailer's Viewpoint," Proceedings of the Forty-Eighth Annual anference on Taxation (Sacramento: National Tax Association, 1956), Pp. 29-34. 88For example, see: John S. Bradley, "Planning for VAT," Accountanc , 82 (August 1971): 437-9; R. G. Bassett, I'Planning for VAT," Accountant, 166 (29 June 1972):852-3; K. S. Carmichael, "VAT: The Work Involved," Accountangy, 83 (September l972):l5-7; Thomas D. Lynch, "Taxation Réform--IV (Indirect Taxation--Value Added Tax)," Accountant's Magazine, 75 (September 1971): 486-9; Thomas D. Lynch, "VAT Approaches," 31 Statements from the United Kingdom prior to its recent adoption of a VAT described initial compliance costs in terms no 89 "90 more specific than "particularly heavy," "intolerably heavy, “9] and "greater than the switch to decimal currency. The Allied Accountancy Bodies (U.K.) "point out that VAT is a far more compli- cated conversion operation than that faced by a business on the introduction of decimal currency--for which five years' notice was n92 given in principle, and two years' notice of the details. One of the books published just prior to the date the United Kingdom VAT took effect, lists on two pages a timetable for action and does 93 not mention the costs of compliance. Some articles about the Accountant's Magazine, 74 (March 1972): 130-3; Ronald Edwards and Walter F. O'Connor, 1'New German Added-Value Tax Requires Immediate Action By U.S. Taxpayers," Journal of Taxation, 27 (November 1967): 294-7; and Schirm, “VAT in Germany," pp. 30-43. For a discussion of VAT and its impact on a computer system, see A. Young, "Computers and VAT," Accountancy, 83 (November 1972): 33-4; "BETA on VAT," Accountant, 166 (2 November 1972): 563-4; and K. J. Neville, ”VAT and The Effect on Computer Systems," Accountant's Magazine, 76 (February 1972): 69-71. For the impact oiia VAT on cash flows see Andrew Likierman, "VAT Effects on Cash Flows," Accountancy, 83 (April 1973): 23-6 and Cambridge Research Institute, TAT, pp. 98-136. 89"Accountants' Concern Over VAT," Accountancy, 82 (September 1971): 492. 90"Problems With VAT," Accountant. 165 (18 November 197]): 676. 91 1 ) "Business Brief: VAT is Coming," Economist, 240 (4 September 971 : 54. 92"Accountant's Concern Over VAT," Accountancy, 82 (September 1971): 492. 93John Chown, VAT Explained: The Business Man's and Manager's Egide to Value Added Tax, 2d. ed. (London: Kogan Page, 1973), pp. 32-3. 32 European experience with value-added taxes contain only general state- ments about compliance problems.94 Since they are so general, they do not materially assist a U.S. accountant in foreseeing the problems he may face. Other articles on the European experience are somewhat 95 more helpful. One article describes a German survey that reports “the amount of extra administrative work [to the firm] caused by the introduction of the value-added tax as from 5 to 20 percent."96 What the article omits is the base on which the percentage is calcu- lated. In addition, since the German VAT replaced a turnover tax, the base for a U.S. firm would not be comparable to the German one. An interesting turnabout concerning compliance costs of a VAT was made by Rudolf Niehus, a German CPA. Prior to the adoption of the German VAT he stated, "It may be said, therefore, that the new law will not t."97 place an undue burden on the accounting departmen Less than two years after the VAT's adoption he stated, “This disadvantage cannot 94For example, see: Egret, "VAT in France,“ pp. 20-9; Forte, “Feasibility of a VAT," pp. 337-61; and Missorten, "Problems Imple- menting a VAT," pp. 396-411. 95For example, see: Peloubet,"European Experience with VAT," pp. 64-75; Peloubet, "Statement," pp. 152-73; and B.F. Reynolds, “Some Administrative Problems of a Value-Added Tax," Value Added Tax: The .94; Position and the European Experience, Edited by TIM. Rybczynski (Oxford: Basil Blackwell, 1969), pp. 44-52. 96Schirm, “VAT in Germany," p. 40. Reporting on a similar (or the same) survey an average increase in paperwork caused by the VAT of 20% was noted by Alfred Zanker, "Europe's Value-Added Tax: Model for U.S.?" U.S. News & World Report, 6 March 1972, p. 76. 97Rudolph J. Niehus, "New German Added Value Tax Law," Taxes, 45 (November 1967): 746. 33 be overlooked: an added value tax law greatly increases the adminis- trative burden on the taxpayer.“98 Considering that the Michigan Business Activities Tax was in effect from 1954-1967, it is surprising that more was not written about the compliance costs of firms. Clarence Lock, then Deputy Commissioner, Michigan Department of Treasury, spoke of the "relative n99 ease of compliance and low cost of administration. T. P. Stapchinskas, of Ford Motor Company, said, "We have found the tax to require minimum of additional accounting records and to be simple in 100 computation." Robert Ebel says "no special accounting procedures 101 were necessary.“ Peter Firmin agrees, "no additional accounting 102 burden is imposed." These views are contradicted by Howard Preston of Preston Shoes, Inc., reporting the views of another small business- man "that the business activities tax imposed additional burdens on 103 the businessman...". Although those who say the tax was an 98Rudolf J. Niehus, "German Added Value Tax - Two Years After,” Taxes, 47 (September 1969): 566. 99Clarence W. Lock, Donovan J. Rau, and Howard 0. Hamilton, "The Michigan Value-Added Tax," National Tax Journal, 8 (December 1955): 366. 100J. P. Stapchinskas, "Taxation of Business in Michigan: Viewpoints of Business Men," Proceedings of the Forty-Eighth Annual anference on Taxation (Sacramento: National Tax Association, 1956), pp. 27-80 10lEbel, "Michigan Business Activities Tax," p. 103. 102Peter A. Firmin, The Michigan Business Receipts Tax, Michi- gan Business Report No. 24 (Ann Arbor, Michigan: Bureau of Business Research, University of Michigan, 1953), p. 140. 103Howard A. Preston, "The Michigan Business Tax as Viewed by Operators of Small Establishments," Proceedings of the Forty-Eighth Agnual Conference on Taxation (Sacramento: National Tax Association, 1956), p. 34. 34 additional burden may be criticized for not quantifying the compliance costs, those who say that there was no additional burden can also be justly criticized. They ignore costs that in fact were incurred, e.g., the cost of filing returns even though no tax might be due. In summary, available VAT literature offers little guidance in identifying the problems a firm would encounter should a VAT be adopted in the U.S. It would be of little assistance to a firm in foreseeing the actions it would need to take or the compliance costs it might incur. Tmportance of This Study It is important to assess the possible effects of a VAT on the accounting of U.S. firms because such an assessment could enable economists, legislators, and businessmen to more realistically apprai se the effects of whatever actions they may be considering in relation to a VAT. Economists have been criticized for building ex- tensive models when "indispensable primary data" is lacking.104 Statements about the possible compliance problems and costs of a VAT Can be similarly criticized because, as has just been indicated, the 1'Hzerature offers little guidance about its effects and costs. This S1iudy provides some data on the effect of a VAT and could enable eCionomists, legislators, and accountants to make wiser decisions concerning it. \ 104Wassily Leontief, "Theoretical Assumptions and Non- Ubserved Facts," American Economic Review, 61 (March 1971): 3. 35 Economists should find this study useful in assessing the nationwide effect of a VAT since compliance costs are part of the burden of the tax. The study will show that the compliance costs for an invoice type of VAT are related to the number of invoices processed. The study will also show the regressive impact of com- pliance costs for an accounts type of VAT. Legislators will need to know the effects of a VAT, both so as to frame their legislation wisely, and so as to assess its impact on their constituents. Admittedly, legislators may be more interested in the burden of the tax among consumers than in the burden Of the compliance costs. However, given the political activity of businessmen, it seems unrealistic to expect legislators to ignore the burden on business. The study will show that most of the compliance costs of a VAT relate to the whole law, rather than to any particular provisions. Changing a few provisions of the VAT law will not mitigate the compliance costs. Accountants and managers should find this study helpful in forming a realistic expectation of the changes in the accounting function and costs that might be caused by a VAT. This study can assist a firm in estimating its own compliance costs. It could also be used as a planning guide to indicate the actions the firm would need to consider, and possibly take, to comply with a VAT should one be adopted. 36 Hypotheses The study investigated the following hypotheses:105 Hypothesis 1 It is not possible to determine the changes that a VAT would require within the accounting function of each firm subject to the tax. Hypothesis 2 The total initial compliance costs of a VAT can be broken into components that can be described in terms of information readily available to a firm's accountant. Hypothesis 3 The total continuing compliance costs of a VAT can be broken into components that can be described in terms of information readily available to a firm's accountant. Hypothesis 4 A dollar amount can be estimated accurately for the VAT initial compliance costs identified in Hypothesis 2. Hypothesis 5 A dollar amount can be estimated accurately for the VAT continuing compliance costs identified in Hypothesis 3. Hypothesis 6 The model TICC = a + gP can be used by a firm to estimate its total initial compliance costs for the stated VAT. Where P = the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices a = a fixed amount in dollars (to be determined) 9 = a coefficient (to be determined) TICC = Total Initial Compliance Costs in dollars 105For the definitions of the terms used within this section see chapter 2. 37 Hypothesis 7 The model TCCC = b + hN can be used by a firm to estimate its total continuing compliance costs for the stated VAT. Where N = the number of sales invoices plus the number of suppliers' invoices processed per year, but not by a computer b a fixed amount in dollars (to be determined) h a coefficient (to be determined) TCCC = Total Continuing Compliance Costs per year in dollars Limitations of the Study The study did not attempt to: 1. Investigate the experience of Michigan or of various countries that have a VAT except as that experience relates to com- pliance costs of firms.106 2. Answer broad taxation questions, e.g., whether direct and indirect taxes are shifted.107 106For example, see Cohen, ”Treasury Says European Experience is Favorable,“ pp. 316-8; and Ebel, ”VAT in Subnational Economy," pp. 1-299. 107For example, see Samuel B. Chase, Jr., "Summary of Con- ference Discussion,” The Role of Direct and Indirect Taxes in the, Federal Revenue System, National Bureau of Economic Research and the Brookihgs Institution (Princeton, N.J.: Princeton University, 1964), pp. 295-313; Jon Thomas Cauley, "The Short-Run Shifting of the Cor- porate Income Tax," Dissertation Abstracts International, 32 (October 1971): 1727-A; William H. Oakland, "A Survey of the Recent Debate on the Short-Run Shifting of the Corporation Income Tax," Proceedings of the Sixty-Second Annual Conference on Taxation (Columbus: National Tax Association, 1970), pp. 525-47; Frederick David Sebold, "An Investiga- tion of the Short-Run Shifting of the Corporation Income Tax," Disser- tation Abstracts International, 31 (May 1971): 5640-A; and Joan Lee Turek, "Short Run Shifting of the Corporate Income Tax in Manufacturing 1335-1965," Dissertation Abstracts International, 30 (November 1969): 32-A. 38 3. Project the effects of a VAT on any aspects of the economic situation in the U.S. or in any state, e.g., its effects 0" the balance of payments. tax incidence. and tax shifting.”8 4. Forecase the short or long run effects of a VAT on such industrial activity as growth, investment, efficiency, pro- duction, and pricing.109 5. Evaluate the merits of a VAT as measured against standards for taxation.”0 6. Compare the merits and effects of a VAT with those of any other type of tax, e.g., the corporate income tax.]]] 108For example, see Henry M. Levin, "An Analysis of the Economic Effects of the New York City Sales Tax," (Brookings In- stitution Repring 127), Financing_Government in New York City, Edited by Dick Netzer (New York: Graduate School of Public Adminis- tration, New York University, 1966); Earl R. Rolph, "The Economic Effects of a Value-Added Tax," in Excise Tax Compendium, U.S., Congress, House, Committee on Ways and Means, Compendium of Papers on Excise Tax Structure (Washington, D.C.: Government Printing Office, 1964), pp. 99-107; and Shoup, Public Finance, pp. 207, 212-8, 236, 242, 244-5, 264-5. 109For example, see John F. Due, "Is the Perfectly Compe- titive Model Useful for Analysis of Price Reactions to Tax Changes," National Tax Journal, 21 (June 1968): 224-6; James Stuart Fralick, "A Micro Econometric Analysis of the Impact of Tax Policy on Invest- ment Expenditures," Dissertation Abstracts International, 32 (July 1971): 67-A; James Edwin Pitts, “The Impact of Tax—Policy on Invest- ment Behavior in the Chemicals and Allied Products Industry," Disser- tation Abstracts International, 30 (October 1969): 13lO-A; and Nancy D. Sidhu, “The Effects of Changes in Sales Tax Rates on Retail Prices," Dissertation Abstracts International, 32 (February 1972): 42l9-A. 110For example, see Tax Foundation, Inc., Federal Non- lgcome Taxes: An Examination of Selected Revenue Sources (New York: Tax Foundation, 1965), pp. 62-7. 111 For example, see Smith, "VAT: Case For," pp. 77-85. 39 7. Determine the effect of a VAT on the managerial decisions of individual firms.”2 8. Survey the opinions of businessmen and voters concern- ing the VAT."3 9. Estimate the costs of a taxing authority to administer a VAT.“4 The study had to develop and use hypothetical VAT laws since there is no VAT in effect in the United States and because it seems un- likely that the United States government or any state would adopt unchanged the law of another country. Estimates for times spent in the performance of certain VAT related actions were made and used, as no actual performance times for those actions were available. Wage rate estimates were developed and used because the actual wage rates of the individuals involved were unavailable. Additional, more detailed, limitations are indicated as appropriate in the chapters on methodology. 112For example, see Dan Throop Smith, Tax Factors in Business Decisions (Englewood Cliffs, N.J.: Prentice-Hall, 1968); Aaron John ton, 'Formation of Prices by Wholesalers in Specified Lines of Busi- ness,“ Dissertation Abstracts International, 16 (1956): 2333; John F. Due, "Studies of State-Local Tax Influences on Location of Industry," National Tax Journal, 14 (June 1961): 163-73; and James Lawrence Gibson, "Accounting and Economics in Decision Making: A Case Study Approach," Dissertation Abstracts International, 31 (October 1970): 453-A. 113For example, see "Which Tax to Raise? An Opinion Poll,” U.S. News & World Report, 29 May 1972, p. 88. 1'4Phii1ip Lifschultz in U.S., Congress, The Value-Added Tax, p. 85. For a discussion of some of the possible problems of the taxing authority administering a VAT see Tait, Value-Added Tax, pp. 124-32; Donald W. Bacon, "Administrative and Compliance Procedures Under a Value-Added Tax," Tax Polic ,‘39 (October-November-December 1972): 87- 92; and Eugene F. Bogan, "A Federal Tax on Value Added--What's Wrong With It? Plenty!" Taxes, 49 (October 1971): 604-7. CHAPTER II METHODOLOGY - DEFINITIONS, ASSUMPTIONS, AND SELECTION OF THE MODELS TESTED Definition of Terms In this study the following terms have been used as defined herewith: l. A Tipm is an organization whose owner(s) desire profit. Ownership may be held by one individual or multiple individuals, in- corporated or not. One or more persons including the owner may work in the firm. 2. Compliance costs are the firm's costs, exclusive of the tax itself, which result from a VAT. If the VAT were not in existence, the compliance costs would not be incurred by the firm. 3. Initial compliance costs are those compliance costs the firm would incur only once. They include costs incurred previous to the date the VAT would take effect and some costs during the first year of the VAT (e.g., personnel training costs). 4. Continuing compliance costs are those compliance costs which would be incurred each year after the effective date of the VAT (e.g., invoice preparation, data accumulation, and preparation of re- Ports for government). 40 41 5. Compliance savings comprise the value of those benefits to the firm occurring because of a VAT. Compliance savings would occur, for example, should the VAT require information that the marketing de- partment could use, but does not currently receive. Compliance savings will be subtracted from gross compliance costs to compute net compliance costs. A net compliance saving could occur were the VAT to replace an- other tax. 6. The term accounting function includes the structure (e.g., people, office machines, forms, and reports) and procedures (e.g., the flow and timing of data) within the accounting department, as well as that portion of other departments processing information related to ac- counting. 7. Persons in the accounting function involved in the proces- sing of sales invoices and suppliers' invoices include: those directly preparing or processing sales invoices and suppliers' invoices; those involved in posting those invoices to the ledger accounts; supervisors of the invoicing process including the treasurer; and those computer programmers, computer operators, and keypunchers who are involved in invoicing. Members of the cost and payroll departments are thus ex- cluded. 8. The components of the total compliance costs resulting from a VAT are the new actions to be taken by each person affected by the VAT and the additional items to be purchased. 9. Information readily available to a firm's accountant is information that the accountant would know already (e.g., accounting forms used), to which he would have ready access (e.g., employee wage 42 rates), that he could determine easily (e.g., reprinting costs for forms), or which he could be expected to estimate reasonably (e.g., the time he would need to familiarize himself with VAT legislation). 10. A dollar amount can be estimated accurately_if the esti- mate would fall within narrow bounds which enclose the expected true value. The degree of accuracy of an estimate depends upon the process by which the estimate was made, how the estimate will be used, and the relationship of the estimate to the estimate of primary interest.1 The estimate is not considered accurate if the information is not read- ily available to a firm's accountant or if the estimate is subject to wide variability. The individual cost estimates are summed to deter- mine the total initial and total continuing compliance costs of the VAT. 11. Sales and suppliers' invoices not processed by a computer are invoices for which the computer (including its printer) is not used to compute, prepare, or check the computations on the invoice. 12. The accounts method of computing the VAT is the use of the firm's ledger accounts as the starting point for computing the firm's VAT liability. The accounts method of computation can be done using either the direct additive or direct subtractive methods des- cribed in chapter 1 (pp.4~6). The hypothetical accounts-type of VAT law developed in chapter 4 will compute the VAT using the direct sub- tractive method. The Michigan Business Activities Tax also used the direct subtractive method. 1As discussed in Yuji Ijiri, The Foundations of Accounting Measgrement (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1967), pp. 42-5. 43 13. The invoice method of computing the VAT is the use of the VAT shown on the invoices both issued and received by the firm as the starting point in computing the firm's VAT liability. The invoice method of computation can be done using either the indirect additive or indirect subtractive methods described in chapter 1 (pp.4-6). The hypothetical invoice-type of VAT law developed in chapter 3 will com- pute the VAT using the indirect subtractive method. The VATs in Europe also use the indirect subtractive method. 14. An organization, a good or service, or a transaction is zero-rated if the VAT rate applied to its sales is 0%. In effect the seller is not required to collect VAT on the sales. When the organiza- tion, good or service, or transaction is zero-rated, the seller is per- mitted a refund for VAT invoiced on purchases related to those sales. 15. An organization, a good or service, or a transaction is pygmpp_from VAT if the seller is not required to collect VAT on its sales. When the organization, good or service, or transaction is ex- empt, the seller will not receive a refund from the government for the VAT for which he has been invoiced on purchases related to those sales. A low value transaction, for example, might be exempt to reduce the costs of collecting the VAT. 16. Routine sales are those sales that would be reported as sales in the firm's income statement. 17. Non-routine sales are sales that are not routine. VAT may be collected on non-routine sales, as, for example, on the sale of fixed assets. 18. A major change is a change requiring new structures and procedures within the accounting function, as well as requiring that 44 some employees have to learn a new set of skills, or that new employees with those skills have to be hired. An example of a major change is computerization of what had been performed by accounting machines or by hand, or the use of accounting machines for what had been performed by hand. Hiring persons to make extensions or percentage calculations on sales invoices is not a major change. Neither is the addition of more accounts to the firm's ledger. Assumptions Made The following assumptions were made in this study: 1. In estimating the total compliance costs of a VAT for an individual firm, the estimation and summation of a large number of ele- ments of the total compliance costs will yield an amount nearer what the actual cost will be than will the estimation and summation of a few elements of the total compliance costs or than will a single estimate of the total compliance cost. 2. Compliance costs due to the VAT can be identified. If certain information required by a VAT is already being generated, gen- eration of the information will not be considered a compliance cost of the VAT. This study will make no joint cost allocations. 3. Although the rates of existing taxes may change, the intro- duction of a VAT will not result in significant savings in the costs of complying with existing taxes. This is based on the assumption that no existing tax would be abolished if a VAT were put into effect.2 2This assumption is supported by: Economic Research Division of the Chase Manhattan Bank, N.A., "Another Tax (VAT)," Business in 45 4. The most recent year for the firm is a reasonable repre- sentation of the level of economic activity of each firm. 5. All people are working at capacity, unless the firm indi- cates the amount of unused capacity in each instance. To assume other- wise would involve the researcher in attempting to measure the unused capacity in each firm, a study in itself. None of the firms inter- viewed indicated that any personnel were working at less than capacity. 6. Accounting machines and computers have sufficient unused capacity that the VAT would not require the purchase of additional equipment. In none of the firms interviewed were the accounting ma— chines or computers regularly used outside of the 8 a.m. - 5 p.m. work- ing hours. 7. Additional time required of salaried and hourly personnel can be valued at an hourly charge rate. 8. The VAT and the added personnel it might require will re- sult in only negligible costs for internal support activities (e.g., the personnel department). 9. The most recent available prices are a reasonable basis for use in costing the elements of compliance activities. 10. Existing fixed costs for such things as office space and depreciation are not allocable as compliance costs of a VAT. These costs would continue whether a VAT were in existence or not. Brief, 103 (April, 1972):4; "The Coming Change in the Property Tax," Business Week, 12 February, 1972, p. 51; and Cambridge Research Insti- tute, Prepared for the American Retail Federation, The Value-Added Tax in the United States - Its Implications for Retailers (Cambridge, Mass.: Cambridge Research Institute, 1970), p. 65. 46 11. If the VAT requires the purchase of fixed assets, a rea- sonable basis for depreciation will be determined. Selection of the Models Tested in Hypotheses 6 and 7 Simple models were chosen since the number of firms examined was small and they were not selected according to a scientific sampling plan. Linear models were chosen because the relationships were assumed to be simple rather than complex. The particular variables tested in the models were chosen because they usually change in the same direc- tion as changes in the firm's size or level of activity. The VAT com- pliance costs for the firms were expected to vary in the same direction as changes in size or level of activity. CHAPTER III METHODOLOGY - DEVELOPMENT OF HYPOTHETICAL INVOICE-TYPE VAT LAW AND ITS RAMIFICATIONS Development of the Law Since a VAT has not been adopted by the United States Govern- ment and since none is in effect in any state, it is necessary to de- velop hypothetical VAT laws and hypothetical accounting requirements for the purposes of this study. This study briefs proposed and exist- ing foreign VAT laws as a basis for constructing hypothetical VAT laws. The form of presentation used for discussions of value-added taxes in European Taxation is followed in this survey, although it seems un- likely that the United States would adopt unchanged the law of any other country. Certain details in existing VAT laws are not needed for this study (e.g., appeal procedures) and are therefore omitted from the provisions of the hypothetical VAT laws constructed in this chapter and the next. The hypothetical laws are not drafted in legal form, as this seems unnecessary for the purposes of the study. The invoice method of computing the VAT (defined in chapter 2) can be done using either the indirect additive or indirect subtrac— tive methods (described in chapter 1). The indirect subtractive method would probably be chosen by the United States Government if it were to adopt a VAT. As discussed in chapter 1, one of the reasons for adopt- ing a VAT is to improve the United States balance of trade. To do so 47 48 would require the indirect subtractive method, as the indirect additive or the direct additive or direct subtractive methods do not identify the amount of the VAT in the total sales price of a particular good. As the indirect subtractive method adds the amount of the tax to the good at the time of sale, it is simply omitted on goods exported. While a VAT using the indirect additive method is possible, there seems to be no advantage to computing the tax on each individual payment when the same result could be obtained by using the direct ad- ditive method and computing the tax on the sum of the payments. This is particularly true if all of the payments of a particular type are to be taxed at the same rate. In addition, there is the problem concern- ing exports referred to above. For these reasons the indirect additive method is not found in practice. The invoice-type of VAT law developed in this chapter and re- ferred to throughout the rest of this study uses the indirect subtrac- tive method of computing the VAT. The term invoice, rather than jggj;_ rect sgbtractive, was used throughout the study as it more easily de- scribes the starting point in computing the firm's VAT liability, the invoices. The accounts-method of computing the VAT (defined in chapter 2) would probably be chosen by a state government, if a state were to adopt a VAT. If the invoice method were used, a sales invoice would have to be prepared for each sale within the state and for each export (shipment across the state line). These invoicing requirements would be a nuisance for firms that make intrafirm shipments into or out of a state with a VAT. Also, if shipments out of the state were not zero- 49 rated, firms could avoid taxes by putting a low value on the intrafirm shipments thus indicating little value was added by the firm in the state with the tax. For these reasons a state would probably use the accounts method of computing the VAT. In this chapter a hypothetical VAT law is developed for an invoice-type of VAT law at the federal level. In chapter 4 a hypo- thetical VAT law is developed for an accounts-type of VAT law at the state level. For each law, the discussion also indicates how certain business events would be treated and what the accounting requirements of the law would be. The compliance costs for individual firms of an invoice-type of VAT are discussed in chapter 6 and those of an accounts- type of VAT in chapter 7. Since discussion of the hypothetical invoice-type law re- quires many references to literature concerning the VAT laws of various countries, abbreviations have been devised for convenience in referring to this literature (see Table 4). Scope of the Tax Supject of Tax E.E.C. 1 (Art. 2) indicates that a VAT is a general tax on consumption. Austria (p. 140), Germany (p. 25), and Netherlands (p. 2) refer to VAT as a turnover tax on value added. It is not necessary to determine the incidence of the VAT since for the purposes of this study the incidence of the tax was not included as part of a firm's compli- ance cost (see chapter 1, Limitations of the Study, and chapter 2, Def- inition of Terms). 50 Table 4. Abbreviations and References Concerning Value-Added Taxation Abbreviation Referencea *T E. E. C. 1 E. E. C. 2 Austria Belgium Denmark France 1 France 2 Germany Ireland Israel Council of the European Economic Community, "First Directive of the Council of 11 April 1967," European Taxation 8 (November-December 1968): 299-300. Council of the European Economic Community, "Second Directive of the Council of 11 April 1967," European Taxation, 8 (November-December 1968): BOT-9. "Austria: Proposals for a Tax on Value Added," European Taxation, 11 (June 1971): I/l39-47. Arthur Young & Company, Principles of the Added- Value Tax (T.V.A.) in Belgium (Brussels: Arthur Young 8 Company, February 1971). "The Turnover Tax on Value Added in Europe- Denmark," European Taxation, 8 (November-December 1968): 251-7. "The Turnover Tax on Value Added in Europe- France," European Taxation, 8 (November-December 1968): 258-68. "France: Simplification of the TVA and Reduction of Certain Rates," European Taxation, lO (Janu- ary 1970): I/26-30. H. Karsten Schmidt, Wulf H. Dfiser, and Christoph Bellstedt (Translators), Added Value Tax Law: English-German Text with Short IntrodUCtion (Chicago: commerce Clearing House, 1967). Ireland, "Proposals for a Value-Added Tax in Ireland" (Extract of the White Paper), Bulletin for International Fiscal Documentation, 25 (May 1971): 175-85. Ben-Ami Zuckerman, "Proposals for a Value-Added Tax in Israel," Bulletin for International Fiscal Documentation, 26 (June 1972): 241-3. 51 Table 4. Continued. Abbreviation Referencea Italy "Italy: Tax Reform," European Taxation, 11 (November 1971): I/282-4. Luxembourg "Luxembourg: Bill for Introduction of Turn- over Tax on Value Added," Eurppean Taxation, 9 (June 1969): 119-26. Netherlands Netherlands, “Netherlands: Tax on Value Added- Text of the Turnover Tax Law 1968 (unofficial translation)," Bulletin for International Fiscal Documentation, Supplement D/E, 23 (JOly-August-September 1969): 2-19. Norway "Norway: Bill for the Introduction of Turn- over Tax on Value Added," Eurppean Taxation, 9 (June 1969): 127-33. Sweden "The Turnover Tax on Value Added in Europe- Sweden," European Taxation, 8 (November- December 1968): 293-8. U.K. United Kingdom, Chancellor of'the Exchequer, Value Added Tax, Cmnd. 4929 (London: Her Majesty's Stationary Office, 1972). aOther literature concerning VAT includes: Ernst & Ernst, Belgium, France, Netherlands, and West Germany - A Digest of Principal Taxes, International Business Series (Cleveland: Ernst & Ernst, 1966- 1970); Price Waterhouse & Co., Information Guide for Doing_Business in Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, and Sweden, Information Guide for Doing Business Series (New York: Price Waterhouse, 1969-1971); and Committee on Value Added Turnover Taxation, Report of the Committee on Value Added Turnover Taxation (Rhodesia) (Salisbury, Rhodesia: Government Printer & Stationer, 1967). These sources, however, are older or less detailed than those in Table 4. 52 Deliveries of Goods and Rendering of Services E.E.C. 2 (Art. 2, 5, and 6) states that all deliveries (". . . transfer of power to dispose of . . .") of goods (new or used, movable or immovable) and rendering of services by a taxable person are subject to the tax. Various exemptions are provided. The coun- tries that do not conform to this are Belgium (pp. 15, 20), which ex- cludes immovable goods from the general statement and Denmark (p. 252), Norway (p. 129), and Sweden (p. 294) which list only those services that are taxable. This study assumes that a United States VAT would apply to all deliveries of goods and rendering of services by a taxable person, with the exception of the exemptions and zero-ratings indicated start- ing on page 59. Taxable Persons Each country defines a taxable person. The E.E.C. 2 (Art. 4) definition is ". . . any person who independently and regularly engages in transactions within the scope of the activities of a manufacturer, a trader or a person who renders services, whether or not for profit." Non-profit organizations, corporations, partnerships, and individuals are included. This study assumes that a United States VAT would include a similar broad definition of taxable person and that it would afford special treatment to certain taxable persons, as is done in Europe (e.g., farmers and small fishermen, Ireland, pp. 181-3). 53 Territorial_Limits Each of the countries states that the VAT law applies to de- liveries of goods and rendering of services within the country. This statement concerning territorial limits plus the statement that the VAT is a tax on consumption means that the VAT is applied where the goods are consumed (destination principle) rather than where they are produced (origin principle).1 It is assumed that a United States VAT would apply to deliv- eries of goods and rendering of services within the United States. The implications of this assumption are that VAT will be collected on imports and that it will not be collected on exports. Importation of Goods Each of the European countries with a VAT collects VAT on goods imported into the country. They do so at the border, at the time of importation, rather than at the time of delivery. This prevents persons from evading a VAT on goods they import and then consume. It also means that a taxable person purchasing imported goods will pay VAT to whomever clears the goods through customs. This study assumes that a United States VAT would also sub- ject imports to VAT at the time of entry into the country. 1Car1 s. Shoup, Public Finance (Chicago: Aldine Publishing Co., 1969), pp. 262-4. 54 Tax Mechanism Type of VAT' All the countries permit the immediate deduction of VAT on capital outlays that are used for purposes which are subject to the tax. This is the consumption type of VAT, which was illustrated in Table 1 along with the gross product and income types. Since it is probable that United States business would lobby for a similar deduc- tion, it is assumed in this study that a United States VAT would be of the consumption type. Method of Computing Tax All of the European VAT countries use the invoice method of computation. Since this method allows the countries to identify the VAT due on each good, it makes it possible for them to remit the VAT collected (or to avoid collecting it) on goods that are exported, ac- cording to the provisions of the GATT (as discussed in chapter 1). Un- der the accounts method, the amount of VAT in an export price would be difficult to identify and therefore to remit. That the United States would for this reason choose the invoice method has been suggested by Gerard Brannon, Acting Director, Office of Tax Analysis, The Department of the Treasury.2 It is assumed, therefore, that the United States would use the invoice method. 2This was indicated by Gerard M. Brannon, letter to the author dated June 23, 1972. 55 When Tax Assessment Occurs A firm may assess the VAT on its sales at the time the sales invoice is issued or at the time cash is collected. Similarly, a firm may determine the amount of VAT credit at the time it receives the sup- plier's invoice or at the time it makes cash payment.3 All countries except Sweden assess the VAT when an invoice is issued or received. Sweden (p. 297), assesses the VAT when payment is collected or made. In any of these cases the good must be delivered or the service ren- dered before the tax may be assessed. If the VAT is assessed at the time cash is collected, prob- lems arise in determining the proper amount of VAT if partial payments are made on an invoice including goods or services taxed at two or more rates. This is not a problem in Sweden, because the country assesses VAT at only one rate. However, since the United States is likely to tax at more than one rate, this study assumes that the United States VAT would be assessed at the time an invoice is issued or received. As the invoice may be issued before or after the title is passed or the service is rendered, this study assumes that for financial statement purposes the date title passes will still determine the existence or non-existence of a VAT liability. This procedure does allow a firm to take a credit on its VAT return for VAT invoiced by its suppliers even though that amount has not yet actually been paid to the supplying firm. 3A fuller discussion can be found in Cambridge Research Insti- tute, prepared for the American Retail Federation, The Value-Added Tax in the United States - Its Implications for Retailers (Cambridge, Mass.: Cambridge Research Institute, 1970), p. 41. 56 Deductions and Refunds In Europe, when a firm determines its VAT liability to the government, it may deduct most of the VAT that is shown on the invoices received from suppliers from the VAT it shows on its own sales invoices. Except for France, the European countries permit the deductible VAT that is shown on suppliers' invoices received in a period to be entirely deductible on the VAT return for that period. France 1 (p. 266) per- mits the deduction of VAT on capital outlays on the return for the per- iod in which they were acquired. VAT on other goods and services ac- quired is deductible on the return for the period following that in which they were acquired. Some VAT is non-deductible, as discussed starting on page 59. If a firm's VAT on purchases exceeds VAT on sales the govern- ment owes the firm the difference. In Austria (p. 146) and Belgium (p. 68), the amount due from the government is carried forward to the next period. The Netherlands will refund the amount on request. In some countries, exporters who regularly have VAT refunds due them are often permitted shorter accounting periods so they may obtain their payment sooner. It is unlikely that United States business would be willing to extend credit to the government in the way that French business does. For this reason, this study assumes that the United States would permit the deduction of all deductible VAT on the return for the period in which the taxed goods and services were acquired. The study further assumes that VAT due a firm from the United States Government will be carried forward, as in Austria and Belgium, except for refunds regularly 57 due to exporters. These refunds are assumed payable upon the filing of a period return by the exporter. Tax Rates The number of VAT rates varies from one European country to another, as is permitted by the E.E.C. 2 (Art. 9). Belgium (p. 35) has four rates of tax and also exempts some goods and services. The U.K. (p. 2) has two rates of tax (one of which is zero) and exemptions for some items. Sweden (p. 297) has one rate and exemptions, but the tax base for certain goods and services is only either 60% or 20% of the consideration, which, in effect, creates multiple rates. It is hard to generalize about European laws in regard to any one good or service and to say where in the range of rates its tax always falls. It does seem that many food items are taxed at a relatively low rate and that financial transactions (e.g., depositing or receiving funds) are usually zero-rated or exempt. A VAT may be calculated so that the tax rate is applied to the price either excluding tax (tax exclusive) or including tax (tax inclusive).4 For example, where the before tax price = 100 and the tax = 25, then the tax exclusive rate (TER) = 25 a 100 = 25%, while the tax inclusive rate (TIR) = 25 t (100 + 25) = 20%. Using TER the seller can price his goods in his usual manner and at the time of sale determine the amount of VAT due. Using TIR the seller needs to price 4Richard N. Lindholm, "The French Value-Added Tax," Oregon Business Review, 27 (February 1968):2 and Alan A. Tait, Value-Added pr_(London: McGraw-Hill, 1972), pp. 3-5. 58 the goods above his usual price so as to include the VAT. At the time of sale, sales would need to be accumulated by applicable VAT rate if there are more than one. Thus under TER the cost of pricing would not be higher, but the costs at the time of sale would be. Under TIR the cost of pricing would be higher, and the time of sale costs could be slightly higher also. The European countries, except Sweden (p. 296), generally use a TER. Taxes are sometimes calculated at both the TER and TIR within one country. In the Netherlands (p. 12), for example, prices quoted to consumers must be tax inclusive. In Germany (p. 77), small traders do not have to invoice the VAT separately and may there- fore calculate the tax using TIR. A question that is important in determining compliance costs is the number of digits included in the tax rate. Ireland (p. 179) and France 2 (p. I/27) have rates consisting of four digits. Denmark (p. 255) has a maximum of three digits, and the other countries a max- imum of two digits. However, the number of digits may change if a TER is figured inclusively, i.e., as the equivalent TIR, or vice-versa. Were the tax exclusive rate 25%, the tax inclusive rate would be easy to calculate and use, TER t (1 + TER) = .25 e (l + .25) = 20% = TIR. Were the tax exclusive rate 4%, then the tax inclusive rate = .03846153 . . . (repeating), which is cumbersome. Even though the rates of a United States VAT may be below 10%,5 this study assumes that at least three VAT rates will exist, a reduced rate, a regular rate, and a zero-rate. Since there will 5Eileen Shanahan, "Nixon's Tax Plan Includes Rebates to Most Families," New York Times, 6 February 1972, p. l. 59 probably be political pressure toward mitigation of the regressiveness of the VAT, this study assumes that goods to be eaten by man or beast will be taxed at the reduced rate and that all other goods and services will be taxed at the regular rate. For demonstration purposes on the VAT return (Figure l) and sales invoice (Figure 2) the rates are as- sumed to be 2% and 4%, respectively. The study assumes that the United States VAT rate will be tax exclusive. However, small retailers might be permitted to use special tax inclusive rates. In addition, tax schedules might be used to avoid the rounding problem in calculations. Since thirty-eight states now use a one-digit sales tax, while only 6 this study assumes that the rates of three use a two-digit sales tax, a United States VAT would consist of just one digit, and that addi- tional rates will not be created by allowing reductions in the taxable base. Exemptions and Zero-Ratings The European VAT laws exempt particular organizations, goods and services, and transactions from collecting VAT on its sales. In some instances, an organization may recover VAT that they have paid on the purchases relating to exempt sales. In other instances they may not. These two meanings for pygmpt_cause confusion. To avoid it, gggg; r§t§g_was defined in chapter 2 as the VAT rate applied to sales is 0%, and the seller is permitted a refund for VAT invoiced on purchases re- lated to those sales. Exempt was defined as no VAT is to be collected 6Commerce Clearing House, Inc., All-State Sales Tax Reporter (Chicago: Commerce Clearing House, 1972), pp. 601-6. 60 on the sales, and no refund is permitted for VAT invoiced on purchases related to those sales. If the sale is exempt, the organization will need to raise its selling price by the amount of the unrecovered VAT, if the firm is to maintain its payments to its factors of production at the same level as the payments would be if the sale were zero-rated. Special Treatment for Particular Organizations and Persons The E.E.C. 2 (Annex A, 2) permits exemptions and zero-ratings for certain types of organizations, and all of the countries have such exemptions or zero-ratings. Small business, agriculture, government, and certain non-profit institutional activities are frequently exempted or zero-rated.7 Belgium (p. 6) exempts doctors, dentists, and lawyers, but not accountants. In Europe the purchases of governments (at all levels) are 8 generally subject to the VAT. In at least one state of the United States, Michigan, governments and non-profit organizations do not pay 9 the state sales tax on their purchases. It is probable that a United States VAT might not require certain organizations to pay VAT on their 7For a discussion of the treatment of the government under a VAT, see: Francesco Forte, "On the Feasibility of a Truly General Value Added Tax: Some Reflections on the French Experience," National Tax Journal, 19 (December 1966):353-6; and Eitan Berglas, "The Effect of the Public Sector on the Base of the Value Added Tax," National Tax Journal, 24 (December 1971):459-64. 8This was indicated by B. P. Dik, International Bureau of Fis- cal Documentation, in a letter to the author dated April 25, 1972. 9Michigan, Department of the Treasury, Month1y_Sales, Use, and Withholding Tax Return (Rev. 9-70). 61 purchases. Alan Tait states that, "There is no reason why government should pay the VAT. To pay the tax would involve a great increase in work simply to achieve a transfer of funds."10 It is assumed in this study that in the United States the goods and services provided by governments, not-for-profit organiza- tions, medical establishments, and private schools will be exempt from VAT or zero-rated, but that certain of their "business-like" activities may be taxable. The study also assumes that these organizations will not be subject to VAT on their purchases, as this would require them to file for refunds or have their costs increased by the amount of the VAT. It is assumed that sales by small business and agriculture will be exempt from VAT in order to reduce their compliance costs and to eliminate from their selling prices the VAT on the value they added. However, since small business and agriculture will be subject to VAT on their purchases, it may be to their advantage to give up their ex- emption and add VAT on their sales, so that they can take the credit for VAT paid on their purchases. Table 5 illustrates the various possible combination of ways in which a VAT may or may not apply to the sales and purchases of an organization. Exemptions or Zero-Ratings for Particular Goods and Services The E.E.C. 2 (Art. 13) allows for exemptions in order to sim- plify collection or to prevent fraud. All countries have exemptions 10Tait, Value Added Tax, p. 39. 62 Table 5. Possible Applications of a VAT and the Resulting Action Required of an Organization. Sales Taxable - Sales Zero-Rated - Sales Exempt - X VAT Collected O VAT Collected O VAT Collected Purchases Pay X minus Y Recover Y No Action Subject to VAT - to from Y VAT Paid Government Government Purchases Not Pay X No Action No Action Subject to VAT - to O VAT Paid Government for particular goods and services. Leasing and hiring of real estate is exempt in some countries, Germany (p. 39) and the Netherlands (p. 5), for example. The sale of land is exempt in Belgium (p. 23) and Ireland (p. 178). Israel (p. 242) will exempt the rentings of real property, but tax the sale of it. All the countries with a VAT have exempted the activities of commercial banks even though it is possible for a VAT to "be applied to commercial banks without double taxation or tax avoid- ance."n The U.K. (pp. 47-51) has zero-rated a number of goods and services that might have been exempted. If a firm's sales are both subject to VAT and exempt, only that portion of VAT invoiced by sup- pliers which is assignable to sales subject to VAT is deductable by the firm. This is the pro rata rule (E.E.C. (Art. 12)). This study assumes that depositing and receiving funds, dis- counting, and granting credit will be exempt, as will be the leasing and renting of real estate and the sale of land. nNabil Aboulfadl, "The Value-Added Tax: An Application to the Commercial Banking Industry," (Ph.D. diss., University of Oregon, 1970 , 176. 63 Zero-Rating for Particular Transactions Certain sales of goods (or services) by an organization that ordinarily would be taxable may be exempted or zero-rated. The GATT and E.E.C. 2 (Art. 10) permit exports to be exempt from VAT, and every European country with a VAT exempts exports. The firm must be able to document the exportation of goods for which it does not collect VAT. Every country also permits the deduction of all VAT paid to other firms in connection with the production of the exported good. In the termi- nology of this study, exports are "zero-rated.“ As one of the reasons for adopting a VAT is to encourage exports, this study assumes that exports would be zero-rated by a United States VAT. Summary of the Types of Purchases and Sales a Business Firm Might Make An individual business firm, then, may purchase from taxable, zero-rated, and exempt organizations. It pays no VAT on what it pur- . chases from zero-rated or exempt organizations. The individual firm may purchase goods and services taxable at a positive rate, ones taxable at a zero-rate, and ones that are exempt. The business firm may sell to organizations whose purchases are subject to VAT and to organizations whose purchases are not subject to VAT. The goods and services sold may be taxed at a positive rate, taxed at a zero-rate, or exempt. Certain sales transactions will be zero-rated because they are exports. 64 How Certain Business Events W6u1d’beTTreated Certain business events are examined to determine if the hypothetical VAT law developed affects that event and thus creates a possible compliance cost for the firm. This section examines the events, and chapter 6 examines the amounts of possible compliance costs for the firms studied. Transitional Measures In most cases in Europe, a VAT was adopted as a replacement for a turnover tax described in chapter 1. In the U.K. (p. 1) it replaced the selective employment tax (SET) and the purchase tax. Each country provided transitional measures particularly for inventory and fixed assets on hand at the time of the change to VAT. This was neces- sary to avoid taxing inventory under both VAT and the turnover tax it replaced. It was also necessary to avoid temporary changes in indus- trial buying patterns, because an item might be taxed at different rates under the turnover tax and VAT. Since it has been assumed in chapter 2 that no tax would be abolished, were a VAT adopted, this study concludes that United States firms would not need to make any special adjustments to their inventory or fixed assets on hand at the time of transition to VAT. The substitution of a VAT for an excise tax, for example, could require special adjustments to the inventory on hand. Leases and contracts would be affected by the VAT since each is a sale of services (of property or of persons). Where an existing agreement states who will pay any increased taxes, no problem arises. 65 However, if the VAT legislation does not state who must pay the amount of the VAT, disagreement will result in those instances in which the existing agreements do not include provisions concerning increased taxes. If both the lessee and lessor are taxable persons, however, any additional VAT that either might have to pay would be deductible on their VAT return. Thus, the disagreement and the costs incurred by the VAT might not be serious. Taxable Base and Discounts In E.E.C. 2 (Art. 8) the taxable base to which the VAT rate would be applied, as shown on the invoice, includes all costs, including freight, excluding the VAT itself. Quantity discounts would be taken be- fore establishing the base. Belgium (p. 30), and Ireland (p. 176) reduce the taxable base by any financial discounts which are offered, even if they are not taken. The other countries do not reduce the taxable base for financial discounts offered or taken. Because of the possibility of firms offering very large finan- cial discounts which could never be taken for some reason and thus reduc- ing the taxable base, this study concludes that a United States VAT would determine the taxable base before considering whether financial discounts were offered or taken. Whether the financial discount applies to the price including or excluding the VAT would probably be left to the indi- vidual firm offering the discount. The taxable base would remain the same in either case. 66 Sales of Used Goods Including Capital Assets In general, the European countries do not provide any special rules for the sale of used goods or for infrequent sales, such as the sale of capital assets. Belgium (p. 92) has special rules for second- hand goods, but excludes motor cars and some other items from them. This study assumes that the United States would not treat the sale of used goods including fixed assets any differently from the sale of new goods. Returns of Merchandise In the absence of statements to the contrary in the European laws, the VAT on the return of merchandise is just the reverse of the way it was handled in the sale. The VAT on returnable containers would be handled similarly. It is concluded that a United States VAT law would have similar provisions. Uncollectible Accounts Under the law assumed for this study, a seller establishes a VAT liability to the government when he prepares his sales invoice. Should the receivable for the sale prove uncollectible, the seller is still liable for the invoiced amount of VAT. Some European countries, for example, Belgium and the United Kingdom, provide no relief for VAT purposes to the seller for VAT invoiced, but never collected. Michigan does not permit the deduction of sales-tax billed, but not collected.12 12Commerce Clearing House, Inc., State Tax Reporter: Michigan (Chicago: Commerce Clearing House, 1972), p. 321. 67 Denmark (p. 256) and Germany (p. 73) provide relief for the seller. This study assumes that a United States VAT would not penalize the seller for VAT billed but uncollectible. It would permit the invoiced but uncollectible VAT to be deducted on the VAT return for those accounts written-off for income tax purposes. The seller would have to list which invoices were unpaid and the VAT related to each invoice. Disappearance of Inventory The European countries do not provide for any special adjust- ment for the VAT paid on purchases of inventory that subsequently dis- appears or is destroyed. No adjustment is necessary, because the VAT paid would have been shown as a deduction on the VAT return in the period the purchase was made. The loss to the firm is only the pur- chase price exclusive of the VAT. It is assumed that a United States law would be similar to the European ones in this respect. All VAT Paid by a Firm will be Deductible by the Firm, with Exceptions Since a federal VAT would be of the consumption type, all VAT paid on the purchase of fixed assets would be deductible entirely in the period of purchase. In Germany (p. 71), if an asset is used for exempt purposes during the first five years after its purchase, then the amount of VAT deductible will be recalculated and reduced. This study assumes that a United States VAT would have a similar provision. 'fi UN 68 In Europe the VAT on certain business expenditures is not deductible. Belgium (p. 66) excludes motor cars; food, lodging, and drink consumed on the premises; and entertainment. Ireland (p. 177) and the United Kingdom (p. 6) exclude private cars and business enter- taining. Since many United States salesmen have company cars, this study concludes that the United States will not have similar special provisions for cars, entertainment, etc. If the expenditure is deduct- ible for income-tax purposes by the firm, then the VAT paid on the ex- penditure will be deductible. Conversely if the expenditure is not de- ductible for income-tax purposes, any VAT paid will not be deductible. Assets which are purchased and then later switched to personal use or the production of exempt goods and services will require a retroactive adjustment to the amount of VAT which was deducted on the VAT return. Self-Deliveries The E.E.C. 2 (Art. 5) provides that goods and services withdrawn from a firm for personal use, or given gratuitously are to be considered taxable deliveries. Personal consumption by individuals in the firm could also be self-deliveries. It is possible that the law would allow the firm to treat such self-deliveries as an exempt item, to identify any VAT paid relating to those self-deliveries, and to treat that VAT as non-deductible. An alternative method would be to require the firm to establish a value for the self-delivery, to determine the appropriate amount of VAT, and to be liable for that amount. 69 It is assumed that a United States VAT would consider self-deliveries taxable and similar to a sale. Income-tax law would govern what constituted a self-delivery and its valuation. Miscellaneous Each country provides for the registration of taxable persons. In the United Kingdom (p. 4), a group of associated companies may apply to be registered as one person for VAT purposes, and a company can apply to have its various divisions registered separately. The effect of the VAT on the firm's cash flow would determine how companies would wish to be registered. This study assumes that a United States VAT would base registration on legal entities, although parent and subsidiary corpora- tions might be combined for VAT purposes to change the impact of the VAT on their cash flow. The European VAT's provide no special treatment for capital gains if they exist. The sale price including the gain is taxed. This study assumes that the United States VAT would be similar to the Euro- pean ones in this respect, even though this is "quite defective from an 13 Such treatment taxes increases in the selling economic standpoint." price which are due to inflation. In some cases, as in Belgium (p. 16), transactions involving intangible assets, such as shares of companies, are not considered as the deliveries of goods and services. This study assumes that a United States VAT law would not consider the purchase and sale of shares a 13Forte, "Feasibility of a VAT," p. 349. ‘0. “ ‘-"\ 7O taxable event. The exchange of goods for shares, instead of cash, would be taxable under VAT. It is assumed that the sale of control of a firm through the transfer of ownership of shares would not be taxable. However, even if this were taxable, the event is so infrequent for any one firm that the VAT compliance costs due to it would probably be negligible. Accounting Reggired py the Hypothetical Law Based on the previously developed hypothetical VAT law and on the description of the treatment of certain business events, this section specifies: the frequency of VAT returns and payments, what information would be required on the VAT returns, the special annual listings of VAT invoiced to customers and by suppliers that a firm might be required to prepare, and the information that would be required on a sales invoice. _ It also lists the ledger accounts that would enable a firm to determine easily the amount of the periodic payment to the government and to com- plete the quarterly returns. Frequency of VAT Returns and Payments This study assumed that eleven monthly returns would be filed and payments made; that three quarterly returns would be filed; that an annual return would be filed with the twelfth payment; that special annual listings of VAT invoiced by customers and suppliers would be filed; and that the firm would have a reasonable length of time after the close of the taxable period to make the payment and file the return for that taxable period. Because of the special annual listings of VAT 71 invoiced by customers and suppliers, it was also assumed that the VAT year starts on January 1 and ends December 31. The quarterly returns requirement is like that of the corporation income tax. Monthly pay- ments were assumed because it seems unlikely that a business would wish to pay the VAT to the government before the cash has been collected from its credit customers. Based on the trend to more frequent payment of payroll taxes it seems unlikely that the Government would permit the VAT to be paid less frequently than monthly. Information Required on the Quarterly and Annual VAT Returns European VAT quarterly and monthly returns vary from the simple one in Denmark, where the firm enters the amount of VAT invoiced, less the amount of tax deductible, equaling the amount of tax owed, to the complex one in France, where a firm might have over forty-five entries plus calculations and totals.14 The following specimen VAT return (Figure l) was developed after considering what information might be reported and reasons for reporting it. The right half of the return is used to determine the amount of VAT liability to the government. The left half of the return is to provide information to the government for enforcement and statis- tical purposes. For simplicity, certain information to be copied from the monthly and quarterly returns and sub-totals have been omitted. Following the VAT return the items on the return are discussed and the reasons for their inclusion stated. 14Cambridge Research Institute, TAT, pp. 42-44. a r"’ 1 ,‘.~ ‘5 72 NAME . .............................. VAT REGISTRATION NUMBER ........ ADDRESS .... ......................................... PERIOD ........ For Routine Sales of Goods and Services Sales (Net of Returns, exclusive of VAT) Domestic @ Rate 0 @ Rate 1 @ Rate 2 Of Exempt Goods and Services Exports To organizations Whose Purchases are not Sub- ject to VAT [1 DDDDD For Non-Routine Sales of Goods Self Deliveries Amount exclusive of VAT I I VAT Invoiced by Other Firms Non Deductible D Uncollectible Accounts Amount exclusive of VAT [:3 Add VAT Invoiced (Net of Returns) @ Rate 0 @ Rate 1 0 Rate 2 Add VAT Invoiced @ Rate 1 @ Rate 2 Add VAT Applicable Less VAT Deductible Less VAT Invoiced But Never Collected Adjustment for VAT related to assets switched to or from exempt production Balance Due Government DDi DO DDDOD Figure 1. Specimen Quarterly and Annual VAT Return for the Invoice- Type of VAT. .1 (lg 73 Sales and self-deliveries of firms may be categorized in num- erous ways. Several of the following may be applicable simultaneously: it is a routine sale, non-routine sale, or a self-delivery; it is sold or issued to an organization or person whose purchases are taxable, or to one whose purchases are not taxable; the good or service may be ex- empt, or taxable at the zero rate, rate 1 or rate 2; and the transac- tion may be taxable or exempt, e.g., an export.15 Of the forty-eight possible combinations, shown in Table 6, on only six should the seller collect VAT. No amount of VAT would be invoiced in the other instances, because the purchases of the buying organization are not subject to VAT, because the goods are exempt or zero-rated, or because the sale is an export. Routine Sales A portion of the return reports the amounts for six categories of routine sales. This enables the Internal Revenue Service to relate the firm's VAT to its income tax returns. The reporting of routine sales as a total (Row 1 plus Row 2 in Table 6) would not by itself suf- fice, since the Internal Revenue Service could not multiply this amount by one of the VAT rates to verify the total amount of VAT invoiced. Not all sales are taxed at the same rate, and some sales are exempt. Routine domestic sales by the applicable rates would be reported. These amounts represent the sales for the cells in Row 1, Columns 3, 5, and 7 of Table 6. Exempt sales need to be segregated from taxable sales, so 15Routine and non-routine sales are defined in chapter 2. The tax rates, exemptions, and self-deliveries are discussed above in chapter 3. Z..- a e I.‘ “'9...“ (IQ-- oh Eii‘ I.‘ 1.1 ‘ 5,4I11. N» I 74 h<> on womnnzm po: men mmmmsusaa mmonz :omcma Lo cow» imecmmco cm ow cFom H<> op pumwnam mcm mommgugza «mos: comcma co cow» -mNPcmmco cm on cpom m4 op pumnnam we: use mammsucaa «mos: comsma Lo cow» um~_cmmco cm on UFom P<> op pomwnzm mew mommsucza mmogz comcma go no?» um~wcmmco cm op uFom m4mmm oz< mecca m4mmmm oz< mooow HQZMXu 1H Scam mmmcwmzm m coe mowcm>mpmnie~om ucm mmme mpnwmmoa we xgmsszm .m mpnmh 11 X .mpmm meg :o umuwo>cw mp upzoz H<> .mFMm we» no umuwo>cw ma upaoz h<> oz 11 O w 5 o m e m N F zzzgou L<> as coawasm we: mew mommgucza o o o o o o o 0 among comcma co cow» 0 -mecmmco cm op cmzmmH 75 >mm>H4mo -ubmm H<> op pomnnzm mew mammcugaa o x o x o o o o mmocz comcmm so cow“ m -mecmmco cm cu cwzmmH zom memoaxm mkmoaxm memoaxm memoaxm N mama _ mama umpmm ocmN mmuH>mmm oz< mmuH>mmm oz< mooou m4m Lopez 1 acacspoccacmz apem . o mmmcwmco cowumzasoo omp oomioo_ A _mcsmocH i mcwczuoceacmz ompmm o mmow>cmm omchoc am_ ¢m_ m.m use mqozm League 1 moow>cmm moon m mmwp_mwooam ocm .manmpmmm> .mmowzn peace oeF oomiom m-¢ .mu_:cu :mNocu i mcvcauomezcmz nmom < cacao cacao Amca__oe Lo cocoa_comao aacoo A.U.H.mv coco Lo com: a mcowppwev .u.H.m cowumowewmmopu imcmwmoo com» com FowcumzocH acme omomxopqu Lo consaz mm_mm _muop osmocoum oumewxocan< .aa_e=cm mecca one ca acwcaccomao .m a_aah 104 make—zoom mLOE < .eecoa .m_mm cc .u.H.m a An adea>cca an a_=oz cocoaacomde .oooccoucw memoaom xoom oocmcoeom .uoocpmumcm a can c? czozm A.Q.H.mv cowpoowc -wmmmpu _mwcumzucH osmocmom uso .xcwasou on» C0 :o_uawcomoo m_cmp_ocucoo on» co oommm o .ownHo .coPFocp icoo so cocsmmmcp m.ELFC as“ spa; 3mw>cmocw cm soc» uocwmpno mm: covmecoCCP mwspa .>x iHHx .aa .APNmF .uoocpmoccm a can ”xco> 3mzv xoom oococoumm ..ocH .pomcpmomcm a zoom oou ooa NN-ON mooseoca oeomapa mace -cmpfioomwz . mcwcsoomezccz muom m Pouch _mpop AmcmFPou Lo comoawcommo cocoa A.u.H.mv coco mo com: a mcoWPPwev .u.H.m cowuoovuwmmopu iocmwmoo cmm> coo mesumaocH save ommmxopasm mo coaszz mopmm Pooch vcoocopm mumewxocaa< .uozcmucou .m epoch Table 9. Description and Volume of Accounting Activity Per Year Per Firm. 105 Description Firm C D Sales Number of Sales Invoices Processed for Routine Sales: Rate 0 Rate 1 Rate 2 of Exempt Goods of Exports to Organizations whose purchases are not subject to VAT Number of Routine Sales Returns Number of Non- Routine Sales Total Number of Invoices Related to Sales Number of Customers Purchases Number of invoices re— ceived from suppliers (other than for the purchase of fixed assets) Number of invoices re- ceived from suppliers for the purchase of fixed assets 375 O 0 2,750 240 O 10 fewa 0 few 5 375. 3,005 12 450 1,500 16,500 few few 0 0 9,400 O 600 15 few 10,015 28 12,000 50 O 0 1,600 100 25 few 1,725 30 5,000 25 O 0 149,450 0 500 50 3,000 few 153,000 7,000 36,000 few 0 0 31,000 1,000 100 few 32,100 2,000 70,000 few 106 Table 9. Continued. Description A B C D E F Number of Purchase Returns few 0 180 50 few 500 Total number of invoices related to Purchases 1,500 16,500 12,230 5,075 36,000 70,500 Number of checks issued for Purchases 1,500 2,600 3,800 1,000 5,400 14,400 Number of suppliers 50 200 150 100 500 115 Total Total number of invoices related to sales and purchases not processed by a computerb 1,875 19,505 22,245 6,800 36,000 70,500 aFor those items listed as "few," no exact number could be obtained from the respondents so 0 was used. bThe sales invoices of firms E and F are processed by a com- puter. SOURCE: The source of the numbers, including classifying the sales by VAT rate, was the interview with the firm's treasurer or controller. 107 Table 10. Number of Persons in the Accounting Function Involved in the Processing of Sales and Suppliers' Invoicesa Firm Action Performed A B C D E F Preparing or Processing Sales Invoices 2 3 2 2 13 5 Processing Suppliers' Invoices 2 l 1 l 6 2 Posting to Ledger 1 l 2 Keypunching 1 8 2 Computer Programming and Operating 2 2 2 Supervising (includes treasurer) 1 3 l l 2 3 Total 5 8 5 7 31 16 \ aThe persons in the accounting function involved in the processing of sales invoices and suppliers' invoices was defined in chapter 2. . SOURCE: Interview with the firm's treasurer or controller. 108 Table 11. Summary of Methods of Processing Sales and Purchases Within Each Firm Processing of Purchases Neither Accounting Machine nor Compu- Accounting Computer Processing of Sales ter Used Machine Used Used Neither Accounting Machine nor Computer Used Firm A Firm 0 Accounting Machine Used Firms B,C Computer Used Firm E Firm F SOURCE: Interview with the firm's treasurer or controller. 109 actions that the firm might be expected to carry out as a result of a VAT. This list was the basis for the lists of possible compliance costs, Tables 19, 20, 27 and 28. The researcher then determined what information would be needed to cost each of the actions and asked each treasurer or controller over one hundred questions to elicit this information. The interviews lasted approximately two hours and were con- ducted at the firm. The respondents answered virtually all of the questions asking for factual information except those concerning wage rates. During the first three interviews wage rate questions annoyed the respondents, probably because of the confidential nature of the information, and yielded virtually no information. For these reasons, wage rate questions were not asked at subsequent interviews. No questions were asked concerning the firm's profitability. A number of questions asking for estimates by the respondent were answered. In some cases an upper and a lower bound was placed on the estimate. It seemed to the interviewer that no respondent gave estimates for which he did not have a certain degree of confidence. When a respondent would not answer a question with a minimum level of confidence, he would usually respond with "Oh, I don't know" or some similar statement. The number and content of the questions were revised as the study prog- ressed. Some questions were dropped after computing the estimated compliance costs far several firms as the information obtained from the questions did not relate or contribute to VAT compliance costs. 1‘. leasi ‘pp fun: not 01 0E PM" .‘r‘V- L fat... DD, .Cnn .\ v I ~ I. I 111 PL .. .(H n h A. I o Cm Mu.» .oP m .o. . a..OUI it" 110 Estimating the Changes Required in the Accounting Function of Each Firm Studied It was originally intended that the interviewed firms estimate at least some of the changes that a VAT would require in their account- ing function, but it was apparent in the interviews that the respondents did not want to take the time to do so. Since the VAT laws used by the researcher are only hypothetical and not something with which the firm will have to comply, and since the respondents were unfamiliar with the hypothetical VAT laws, it is understandable that they would not care to make such estimates at the present time. If a VAT were to become a reality, however, then after the accountant had become familiar with the provisions of the VAT law it would be easy for him to determine the changes required in his firm's accounting function because he is so intimately acquainted with it. In each interview, the respondent was asked to describe the accounting function of his firm as it related to the processing of sales invoices prepared by the firm, suppliers' invoices received by the firm, and posting these transactions to the ledger accounts. Based on the researcher's knowledge about the firm and the hypothetical VAT laws and their accounting requirements, the researcher estimated what changes in the firm's accounting function would enable it to comply with the VAT. In many instances the changes were discussed with the firm at the time of the interview. The remaining changes were determined by the researcher subsequent to the interview. While these changes in the accounting function would enable a firm to comply with the VAT they may not be the A, 3. 1 11.1%“. o q 2' .lilla! Wald f) ‘17 111 optimal set of changes for that firm to minimize its long run VAT compliance costs. Cost Estimates Preparing the Cost Estimates The changes required of the firm to comply with the hypothet- ical VATs would be accomplished by certain actions within the firm. The lists of possible compliance costs, Tables 19, 20, 27 and 28, describe each action and indicate the estimated cost of each. A number of actions are included which were not required by any firm in this study, but might be required were the study replicated with other firms. After identification of the action, for example, preparation of the annual VAT return, it was determined whether the action would involve personnel or not. The dollar amount for each action involving personnel was estimated in the following manner: 1. Determine the persons in the accounting function who would be affected by the change; 2. Relate the job titles used by the firm to the titles used in Cost to the Firm Per Hour and Minute of Effective Production Time~for Selected Types of Employees, Table 12; 3. Estimate the wage rate of each person affected by the change, and let W represent that wage rate; 4. Determine individual actions required by each person affected by the change; 5. Estimate the additional time required for each person affected to perform the action once, and let T represent that time; (’19 1‘9th ttes 1 mom: I‘OJIII l lilier; 3+. t, _’ {Ties t o (I) (fl 112 6. Estimate the number of times each person will perform the required action, and let N represent that number; 7. Estimate the total cost to the firm, which would equal W times T times N. Certain actions, few in number, do not involve primarily personnel, for example, purchasing additional equipment. The dollar amount of each non-personnel action was estimated in the following manner: 1. Estimate the cost of one item, and let C represent that cost; 2. Estimate the number of those items required by the firm, and let N represent that number; 3. Estimate the total cost to the firm, which would equal C times N. For an accurate estimate of the VAT compliance costs of his firm, a firm's accountant would need to follow the procedures just described which were used in this study. Data concerning wage rates (W), the number of times each person will perform an action (N) or the runnber of items required (N), and the cost of an item (C) are readily available to the accountant and could be expected to be more accurate and less time consuming to obtain than that used in this study. Data concerning the additional time required for each action (T) is not presently readily available to a firm's accountant and he would need to refer to this study or develop his own. The next three sections of this chapter discuss the wage rates (W), personnel performance and training times (T), and the 113 estimates of non-personnel costs (C) used in this study. The number of times each action would be performed (N) and the number of items required (N) were based on the interviews with the firms and are summa- rized in Tables 9 and 10. Estimates of Wage Rates As was indicated above, the interviews did not provide infor- mation concerning wage rates of individuals within the firm, apparently because of the confidential nature of the information. This section develops and explains the wage rates used in this study for individuals within the firm and outside it. Employees Within the Firm The Michigan Salary Survey_Report - 1971 was used to develop wage rate estimates for employees within the firm, but not including the treasurer and the head of marketing.3 This survey was of 250 Michigan firms, who employ 22 per cent of all wage and salary workers in the state. The hourly rate reported was the straight time rate and excluded overtime payments and shift premiums. From the wage rates listed for each accounting position, the median hourly rate was selected. The amounts of unproductive employee time (e.g., vacations) and firm- paid fringe benefits were then estimated and a factor calculated through the use of which the straight time rate was increased, so that the 3Michigan, Civil Service Commission, Salary Surveijepppp- 1971, (Lansing: Michigan Civil Service Commission, September, 1971). 114 adjusted wage rate represents the cost to the employer per hour of effective production time. The formula was constructed as follows: [(Wage rate per hour x total annual hours for which the employee is paid) + employer's annual contribution for Social Security and Medicare + employer's annual con- tribution for unemployment insurance + employer's annual contribution for workmen's compensation insurance + employer's annual contribution for other fringe benefits] 4 total annual hours of effective production time for the employee. The construction of the components of the formula is shown in Appendix A. The numbers derived there are as follows: total annual hours for which the employee is paid = 2,088 hours; employer's annual contribution for Social Security and Medicare = 5.85 times 2,088 times the wage rate per hour for employees whose wage rate is less than or equal to $5.172 per hour and $631.80 for employees whose wage rate is greater than $5.172 per hour (a distinction is made between those earning less than or equal to $5.172 and those earning more because in a year the latter would reach the maximum the firm would have to con- tribute to Social Security and Medicare); employer's annual contribution for unemployment insurance = $54.18; employer's annual contribution for workmen's compensation insurance = .0017 times 2,088 times the wage rate per hour; employer's annual contribution for other fringe benefits = $252.; and total annual hours of effective production time for the employee = 1,749.6 hours. Table 12 lists the positions selected from the Salary_Survey Report - 1971 and gives the effective cost per hour for each one. The Table 12. 115 Cost to the Firm Per Hour and Minute of Effective Production Time for Selected Types of Employees Position and Descriptiona Hourly Rateb Hourly Rate X Adjustment Factor = Cost Per Effective Hourc Cost Per Effective Minute Employees earning less than or equal to $5.17 per hour Account Clerk-Intermediate ...adding, crossfooting, pre- paring invoices, making simple adjustments to the accounts, not required to know bookeep- ing principles... Account Clerk-Senior ...posting subsidiary ledgers, marking journal distribution of costs and discounts... Accountant-Junior ...college degree... Clerk - Junior ...filing, proofreading... Clerk - Intermediate ...checking records, reports to specified standards... Clerk - Senior ...preparing reports, com- posing correspondence... Computer Operator ...loading and running programs... Computer Programmer ...converts routines to electronic data processing equipment... $2.863 3.550 4.225 2.424 2.783 3.336 4.080 4.761 $3.798 4.667 5.521 3.242 3.696 4.396 5.337 6.199 $.0633 .0778 .0920 .0540 .0616 .0733 .0890 .1033 116 Table 12. Continued. Hourly Rate X Adjustment Factor = Cost Cost Per Position and Hourgy Per Effective Effective Descriptiona Rate Hourc Minute Key Punch Operator $2.951 $3.909 $.O651 Shipping and Receiving Clerk 3.710 4.869 .0812 Typist - Junior ...typing reports from clear copy... 2.659 3.539 .0590 Typist - Intermediate ...types from a variety of sources... 2.755 3.661 .0610 Typist - Senior ...composing letters from oral instructions... 3.084 4.077 .0680 Employees earning more than $5.17Aper hour Buyer - Senior 6.537 8.350 .1392 aMichigan, Civil Service Commission, Salary Survey Report- 1971. * bMichigan, Civil Service Commission, Salary Survey Report- 1 71. cThe adjustment factor is explained in Appendix A. For em- ployees earning less than or equal to $5.172 per hour the formula used was wage rate per hour x 1.2653 + $.175, and for employees earning more than $5.172 per hour the formula used was wage rate per hour x 1.1954 + $.536. 117 Salemy Survey Report - 1971 did not include data concerning treasurers or the heads of marketing. The following limitations are present in the cost-per-effective- hour rates developed. It should be noted that the rates are based on a number of estimates and assumptions including assumptions 7 and 8 in chapter 2. Thus, the cost to a particular business firm for an employee may vary from those developed, e.g., the unemployment insurance rate may be higher as well as the amount paid for fringe benefits. Secondly, a particular firm, in actuality might obtain additional work from employees by making more effective use of existing time (thus at no cost to the firm), or salaried personnel may be required to work over- time without compensatory time or additional pay. Conversely, additional work might be obtained only by paying an overtime premium. Were the firm to hire part-time employees as a result of the VAT, their effective cost to the firm could be above or below the cost calculated. Treasurers or Controllers The firms interviewed did not provide information about the wage rates of their treasurers or controllers. The researcher there- fore obtained estimates from management recruiting firms for the entry level and maximum salary a certain size industrial firm might pay its 4 treasurer or controller. The size firm was one with sales of $3-5 million and eight to fifteen accounting employees. The median entry 4Telephone interviews were conducted on May 23, 1972 with James Griffin, Manager, Management Recruiters, Lansing, Michigan; Gordon Lowell, Gordon Personnel Associates, Lansing, Michigan; and James Steel, Snelling & Snelling, East Lansing, Michigan. 118 level salary and median maximum salary were averaged to equal $21,750 per year. This amount was assumed as the salary of each firm's treasurer or controller. The following formula was used to determine the cost per effective hour for a treasurer: (annual salary + employer's annual contribution for Social Security and Medicare + employer's annual con- tribution for unemployment insurance + employer's annual contribution for workmen's compensation insurance + employer's annual contribution for other fringe benefits) 4 total annual hours of effective production time. The components of the formula were: employer's annual contri- bution for Social Security and Medicare = $631.80;5 employer's annual contribution for unemployment insurance = $54.18;6 employer's annual contribution for workmen's compensation insurance = $36.98 = $21,750 x .0017;7 employer's annual contribution for other fringe benefits = 5Commerce Clearing House, Inc., §Tendard Federal Tax Reporter- 1973 (Chicago: Commerce Clearing House, 1973), para. 113. 6This is based on the average employer unemployment insurance tax rate as a percent of taxable wages in Michigan in 1968 of 1.29 per- cent times the wage base to which the tax applied in Michigan in 1972 which was $4,200. Tax rate from U. S., Department of Labor, Manpower Administration, Unemployment Insurance Tax Rates by Industry-1968 (Washington, D.C.: Government Printing Office, 1970), p. 237, and wage base from Commerce Clearing House, Inc., State Tax Guide - All States (Chicago: Commerce Clearing House), para. 535. 7The rate of 17¢ per $100 payroll was stated by W. 0. Morgan, Michigan Workmen's Compensation Rating Bureau, in a letter to the author dated February 15, 1973. 119 $252.00;8 total annual hours of effective production time (1944) = days at work per year (243) x effective production hours per day (8).9 Thus, the cost to the firm per hour of effective production time for a treasurer is $(21,750. + 631.80 + 54.18 + 36.98 + 252) t 1944, or $22,724.96 4 1944 = $11.690, the cost per effective hour. The cost per effective minute = $.1948. The limitations cited above for the employees within the firm also apply to the hourly rate for a treasurer or controller. In addi- tion, the annual salary of the treasurer or controller is related to the size of his employing firm. If this study were replicated using larger firms, then the treasurer's or controller's hourly rate should be recomputed. Heads of Marketing, Again, because the firms did not provide information concern- ing their wage rates, the researcher had to estimate them. Based on the telephone interviews, a cost per effective hour of $11.69 and a cost per effective minute of $.1948 were estimated.10 Accounting,MachinesVReprogrammers For those firms using accounting machines to post to the ledger, prepare check advices, etc., a VAT would necessitate changing 8This was estimated based on the telephone interviews of May 23, 1972 with James Griffin, Gordon Lowell, and James Steel. 9These were estimated based on the information provided by the firms interviewed. 10Telephone interviews of May 23, 1972 with James Griffin, Gordon Lowell, and James Steel. 120 some of the panels, bars, boards, or punched tape used to program the machine. The firms that were studied that use accounting machines in- dicated that they would have a representative of the manufacturer do the conversion, rather than attempt it themselves. The Lansing, Michi- gan office of an accounting machine manufacturer indicated that the billing rate for the conversion of accounting machine programs would be $25.50 per hour.11 This is the hourly rate that has been used in the study for this type of accounting machine conversion work. CPA Tax-Advisors The firms studied indicated that they would consult with their CPA if an invoice type of VAT were adopted. The most frequently mentioned reason was to check that the firm interpreted the VAT law in the same manner as the CPA. The respondents indicated widely varying hourly rates they expected their firms would be billed by a CPA for this consultation. The lowest rate cited was $12.50 per hour and the highest was $60 per hour. The remainder were in the range of $25 to $35 per hour. The researcher was hesitant to reject most of the CPA hourly billing rates estimated by the firms because the firm's estimate of the billing rate of its CPA ought to be more accurate than the esti- mate of an outsider. Except for the rate of $12.50 per hour, the study used the estimate given by each firm in the calculation of its compli- ance costs. It is recognized that CPA billing rates vary, although they may not in fact vary as much as the respondents' estimates of 11This was indicated by the Borroughs Corp., Lansing, Michi- gan in a letter to the author dated May 24, 1972. 121 those rates. However, the rate of $12.50 seemed so unreasonably low that the rate of $20 was used for the calculation of that firm's com- pliance costs. Estimates of Personnel Performance and Training Times The sources of these time estimates were the treasurer of controller of the firm, standard time data, or the researcher. The source of the time estimate for the possible compliance costs of Tables 19, 20, 27 and 28 are indicated in the code number assigned to that cost; see Table 16. The non-availability of reliable time esti- mates from the firm or standard time data forced the researcher to make his own estimate in a number of instances. An accountant prepar- ing an estimate of the compliance costs for his firm could use the times estimated in this study as a starting point, but he would un- doubtedly wish to make adjustments to reflect the characteristics of his particular firm. Estimates Solicited from Firms The time estimates solicited from the respondent in each 'firm concerned primarily the time for the respondent to become famil- iar with the VAT legislation, consulting time with the firm's CPA, and the time it used to take the respondent to prepare the Michigan BAT rmaturn. The restriction of the estimates to estimates of these types were for two reasons. The treasurers and controllers were unfamiliar vwith the details of the hypothetical VAT laws and were not interested in send ng Pitts VOUI< essary so Saintly, It) did 1 Michel 32m 51m Tate of I invoice-I iira I'd. estimate ical acc Iii Pet). are 1.111 annual r‘ '7'" f L) 1) f? f - _J ' /(: 122 in spending the time to become familiar with them. Reliable time esti- mates would not be obtained when detailed knowledge of the law was nec- essary so the researcher did not ask the respondents for such estimates. Secondly, the respondents in some cases would not make an estimate when they did not have a certain degree of confidence in their estimate. As indicated previously, they would respond with "Oh, I don't know" or some similar statement. To provide a standard for measurement the respondent's esti- mate of the time he would need to become familiar with a hypothetical invoice-type VAT law was based on his brief examination of "Proposals for a Value-Added Tax in Ireland," a proposal eleven pages long.12 The estimate of the time he would need to become familiar with a hypothet- ical accounts-type of VAT was based upon a perusal of a Michigan annual BAT return,13 as was his estimate of the time he used to spend to pre- pare the Michigan BAT return. Each of the respondents had prepared an annual BAT return before the BAT was repealed. Estimates Developed Based on Standard Time Data An analysis of the invoicing and reporting requirements for txrth hypothetical laws reveals that the actions needed to comply with 'the VAT would be similar in all the firms studied, but the times needed 12Ireland, "Proposals for a Value-Added Tax in Ireland" (Ex- tract of the White Paper), Bulletin for International Fiscal Documenta- tion, 25 (May 1971): 175-85. 13Michigan, Department of the Treasury, Business Activities Tax-Annual Return (Rev. 7-67). Ii perform fidlildual retired 1 him is titties 0‘ in this 1411. (an it perior tion of ( certain I tions. titusand tion rel 123 to perform these actions would vary from firm to firm. For example, individual sales of six digits rather than five would affect the time required to perform an action. Since the time required to perform each action is less than a minute, it was impossible to obtain accurate es- timates of these times from the interviewed controllers and treasurers. For this reason, this study bases estimates on the article, "How Much Work Can You Expect,"14 which provides in detail the times necessary to perform common office operations. The article describes the opera- tion of certain machines, e.g., adding machine, and the performance of certain work, e.g., typing, in terms of a number of component opera- tions. The time to perform each component operation is given in ten- thousandths of a minute. The standard time for each accounting opera- tion related to a VAT was determined by breaking the operation into components, selecting the appropriate time from those given in the ar- ticle, and then computing the total times, as shown in Table 13. Ap- pendix B quotes those times used in this study for estimating standard times for various actions. Appendix C shows the computation of each of the time estimates shown in Table 13, as well as the minor assump- tions related to those computations. Use of the above time estimates are subject to the same lim- itations that exist in any situation where predetermined time standards 14"How Much Work Can You Expect?”, Modern Office Procedures, 'L3 (April 1968): 51-2. Textbooks on office management explain how to (k) office time studies, but give only a few examples of the results of such time studies. For example, see George R. Terry, Office Management arui Control 6th ed. (Homewood, 111.: Richard D. Irwin, Inc., 1970), chapter 20 and John J. W. Neuner and B. Lewis Keeling, Administrative (TFfice Management 5th ed. (Cincinnati: South-Western Publishing Com- ifiiny, 1966), chapter 15. 124 Table 13. Time to Perform Certain Accounting Operations Related to a VAT. Description of the Accounting Operation Minutes to Perform that Operation Typing ledger account title Handwriting VAT registration number of the buying firm On a sales invoice (the number in parentheses refers to the index number on the specimen sales invoice, Figure 2): Typing VAT registration number of buyer (p) Entering the net amount of an item in the proper VAT rate column (1§)-(1p) Additional typing of "Sub" (29) Adding amounts in a VAT rate column (Q) - (2_5) Entering the total sales for each VAT rate column or exempt column used (ge)-(g§) Crossfooting of the VAT sales by rate and of the exemption (pp), if more than one column used Comparing crossfooting of the VAT sales by rate (pg) with vertical addition of the net amount (21) Calculating the amount of VAT for one VAT rate (_21) . (28) Entering the amount of VAT due (22), (gs), (29) Additional typing of, "VAT" (22) Crossfoot the amount of VAT applicable at 2% (rate 1) and 4% (rate 2) (39) Additional typing of, "total" (3T) Adding "total before VAT added" amount and "VAT" amount to determine total amount (pg) Entering the total amount due (3g) Additional typing of special rates (TA) Non-routine sale .4740 .1140 .0615 .0487 .0096 .0255 per amount + .0240 .0679 .0321 per column + .0240 .0405 .1071 .0615 .0391 .0684 .0455 .0462 .0699 .0807 125 Table 13. Continued Description of the Accounting Operation Minutes to Perform that Operation Self-delivery Export Buyer's purchases exempt from VAT Comparing an added total of a VAT rate with column total on a sales invoice Checking the VAT calculation for one VAT rate Comparing crossfooting of VAT by rates with total VAT on a sales invoice Checking the total due Annual listing of VAT on uncollectible accounts Per account (debtor) written off Per invoice written off Annual listing of VAT invoiced by customer Per customer Per invoice Annual listing of VAT invoiced by the firm's suppliers Per supplier Per invoice Sorting documents from numerical sequence by invoice number into groups by VAT registra- tion number (firm name) Total time per invoice = .0382 + (.0001) (number of firms) Sorting documents from groups by VAT registra- tion number into numerical sequence by invoice number Total time per invoice =(digits in total number of documents)(.0221) .0711 .0487 .1351 .0405 .1482 .0297 .0981 .2494 .2768 .2704 .0467 .2704 .0467 SOURCE: Appendix C, which this table summarizes. 126 are used. Among the assumptions underlying the time estimates are the 15 it is possible to define and time human motions with ac- following: curacy, as is assumed in "How Much Work Can You Expect;" it is possi- ble to isolate the defined motions; the time required by a series of motions is the sum of the individual motions; and times derived from one situation can be applied to other work situations. The time esti- mates make no statement about the effect of learning on the times. Neither do the time estimates make any allowance for the detection and correction of errors nor an allowance for fatigue and personal time. It is also possible that in the detailed computations of Appendix C, the researcher has omitted some actions that an employee would need to perform in order to perform an accounting operation. Estimates Made by the Researcher Time estimates for a number of the possible compliance costs could not be obtained in the interview with the treasurer or controller) nor from standard time data. These estimates could have been omitted from the study or made by the researcher. Omitting them would mean that the compliance cost estimate for a firm would have understated the probable total by some unknown amount. As the study was interested' in total compliance costs, the researcher estimated those times which could not be obtained from the interviews or standard time data. The coding system for the possible compliance costs, Table 16, identifies these estimates. The coding also reflects the researcher's judgment 15Bertram Gottlieb, "Limitations of PMTS-Predetermined Motion Time Systems," Systems and Procedures Journal, 17 (July-August 1966): 15-20. 127 as to the accuracy of each of these estimates. The three categories are that the time estimate was: estimated accurately as defined in chapter 2; not estimated accurately, but the information is readily available to a firm's accountant (defined in chapter 2); and not esti- mated accurately, and the information is not readily available to a firm's accountant. Coding the individual compliance costs in this manner enables the reader to discern the impact of the researcher's estimates and, if he so desires, to substitute his own estimates and to observe their impact. There are limitations to these researcher-estimated times. First, they are based on the researcher's background and experience. Secondly, they do not make allowances for variation in employee abil- ity. As employee ability and wage rates may be directly related, the cost (wage rate x time) to teach an employee a given amount of knowl- edge may not vary much. Thirdly, while an individual time estimate may be reasonably accurate, the cumulative effect of an error could be significant. The remainder of this section discusses some of the problems in estimating computer reprogramming time, and the time estimates where more than one individual would be involved, for example, training time for employees. When the time estimate involves the time of only one individual, for example, the treasurer, that time estimate has been stated in the list of possible compliance costs Tables 19, 20, 27 and 28. Employees whose job will be affected by a VAT will require training concerning the VAT. As will be shown in chapter 7, Hypothesis 128 1, an accounts-type of VAT will not require an employee to change his present routine in his day-to-day work. Chapter 6, Hypothesis 1 will show that an invoice-type of VAT will require changes in the employee's routine. In Table 14 are identified the bodies of knowledge that would enable an employee to perform his job, as it is affected by an invoice- type of VAT, and the times the researcher estimates it would take one employee to learn it. The most basic knowledge, which all affected em- ployees would need, is listed first. As the table progresses, the knowledge listed becomes progressively more complex and is therefore needed by fewer and fewer employees. A set of times the researcher hesitated to estimate concerned computer programming times which includes the time to change product code numbers if necessary, redesign the input medium (e.g., card or tape), rewrite, text and de-bug existing programs. William Sharpe has stated, "It is particularly difficult to estimate the cost of program- ming a given task or set of tasks."16 After interviewing the data processing installations of eleven firms, another researcher stated, "The systems people sometimes made substantial errors in their cost estimates even when the job description was complete and clear."17 Given these findings it seemed most unlikely that applicable standard time data could be found. 16William F. Sharpe, The Economics of Computers (New York: Columbia University Press, 1969), p. 529. 17Lester Edward Heitger, "Criteria for Transfer Pricing of Data Processing Services Within Business Firms," (Ph.D. diss., Michi- gan State University, 1972), p. 78. 129 Table 14. Estimated Time to Train Employees Concerning a VAT Time in Knowledge Employees Are to Obtain Minutes For An Invoice Type of Vat General, including how VAT applies to returns of goods and discounts .gg Total 30 VAT rates and exemptions It is assumed that if the firm were to have numerous goods at other than 1 rate, that the product code would be adjusted so as to make identification of the applicable rate easy Rates applicable to goods and services 20 Exempt Goods and Services 15 Exports 10 Organizations whose purchases are not subject to tax ‘Tg Total 60 Checking invoices for accuracy Errors to look for 10 How to resolve errors found gp_ Total 30 Special treatment to be afforded: Sale of assets 6 Self-deliveries 2 VAT non-deductible _T; Total 30 For An Accounts Type of Vat No additional knowledge is needed. SOURCE: Estimates of researcher. 130 To have obtained useful estimates from the firms, the firms would have been required to spend a considerable amount of time making estimates and/or actually performing the reprogramming tasks. The firms with computers interviewed were not prepared to do this. The As- sistant Comptroller of Goodyear Tire and Rubber Company, commenting on estimating the cost of reprogramming his firm's computer system in re- sponse to an invoice-type VAT wrote, "It is horrible enough to contem- plate that necessity in the event we are so required by law and, short of that, I cannot bring myself to face up to it."18 Thus, the lack of alternative computer programming time estimates required the researcher to estimate these times. The following table indicates some other times estimated by the researcher. It was assumed that the firm's accounting function was operating so as to accumulate the VAT related information in the proper VAT ledger accounts. It also assumed a trial balance has been prepared with year-to-date figures for each account. It should be noted that a practicing CPA was consulted be- fore making time estimates concerning certain costs related to the year-end cut-off.19 The researcher obtained some estimates from the firms as to their error rates on sales invoices prepared and supplier invoices received, but could not obtain from the firms a means of transforming these estimates into times to detect and correct errors 18S. L. Lacks, Assistant Comptroller, The Goodyear Tire and Rubber Company, Akron, Ohio in a letter to the author dated May 25, 1972. 19Interview on April 26, 1973 with Danny C. Williams, Urbach, Kahn & Werlin, Albany, New York. 131 Table 15. Time to Perform Certain Accounting Operations Description of the Accounting Time in Operation Related to a VAT Minutes For An Invoice Type of VAT Preparing a trial balance, income state- ment, and balance sheet - per account .5 Find in a trial balance the balance of an account 1. Determine the amount of VAT to be paid monthly to the government Find in the trial balance the balance of 8 accounts x 1 minute (per above) (VAT invoiced; routine rates 1 and 2, non- routine 1 and 2, routine returns rates 1 and 2; VAT deductible, and VAT paid to government) Other time __ Total 15 Time to prepare check or voucher check 1 Time to complete quarterly and annual VAT return Estimated number of accounts in the trial balance of a firm would have to consult = 21 (see Table 7) 21 Time to check and sign return TA_ Total 35 For An Accounts Type of VAT Time to complete quarterly VAT return Time to obtain sales figure 1. Time to obtain and accumulate allowable deductions 24. Time to apply apportionment formula and determine tax ...r 0101 Time to check and sign return .b UT Total SOURCE: Estimates of researcher. 132 stemming from a VAT. Another set of times that were difficult to esti- mate concerned the additional time an employee requires to perform his VAT related task while he is still learning the task. The performance times estimated previously assume the employee has learned his task. In effect a relatively gentle sloping area on a learning curve has been reached. The researcher estimated this employee learning time keeping in mind that a number of the actions resulting from the VAT would prob- ably not be subject to a great deal of learning by the employee. For example, performing a percentage calculation on the sales invoice, would not require much learning time on the part of an employee who al- ready performs percentage calculations although not for a VAT. Estimates of Non-Personnel Costs All six firms interviewed purchased one or more tax subscrip- tion services such as those provided by Commerce Clearing House, Inc., Prentice Hall, Inc. or the Bureau of National Affairs, Inc. Each of the above publishers was contacted for an estimate of the price for a subscription service for a federal invoice type of VAT. One publisher responded that he "would guess" that a one volume unit would sell in- itially for $175.20 He also guessed that this unit would increase the price of an existing series by $75. As the hypothetical invoice-type VAT law seemed relatively uncomplicated, it was assumed that the VAT subscription service would be added on to an existing service, so the $75 amount was used for the purposes of this study. 20This was indicated by one of the services, which wished to remain anonymous, in a letter to the author dated June 1, 1972. 133 Another compliance cost a firm might incur would be the one- time reprinting of their supply of sales invoices to include the infor- mation required by an invoice type of VAT. Two firms who print busi- ness forms were contacted.21 If a substantial number of copies were to be printed and the composition were relatively simple, neither firm expected that the customer would be charged extra for altering the sales invoice because of the VAT. The competitiveness and practices of the printing business appeared to be the reasons for the lack of an additional charge. It is possible that if a VAT were adopted and a large number of firms wanted their sales invoices reprinted during the same time period there would be a special composition charge by the printers. Assuming there would be a substantial period of time before the VAT became effective, sales invoice composition costs to the firm by its printer were estimated to be zero. On the date the VAT becomes effective a firm could have a quantity of accounting forms, particularly sales invoices, on hand which are made obsolete by the VAT. These forms would be a sunk cost to the firm, but had the VAT not been adopted the forms would have been utilized. If the firm uses neither an accounting machine or a computer it may be able to avoid this obsolescence by using up their supply of old forms and introducing the revised ones prior to the effective date of the VAT. Where an accounting machine, such as in firms B and C, or particularly a computer, such as in firms E and F, is used in the pro- cessing of sales the obsolescence of some quantity of accounting 2(Telephone interviews were conducted on May 24, 1972 with Superior Business Forms, Inc., Lansing, Michigan; and Wileden-Cullen Co., Lansing, Michigan. 134 documents seems inevitable. It seems unlikely that the revised account- ing machine or computer programs would be inserted in the machines the moment the old supply of sales invoices, for example, is depleted. Determining the additional computer equipment that might be needed because of the VAT could have been a difficult task. In his study on the pricing of data processing services, Heitger states, "Typ- n22 ically there is no simple measure of capacity . . . In none of the firms interviewed were the computers or accounting machines used out- side of the 8 a.m. - 5 p.m. working hours. Thus, the assumption was made (chapter 2, assumption 6) that those machines have sufficient un- used capacity that the VAT would not require the purchase of additional equipment. Also because of the excess capacity, any additional com- puter processing time due to the VAT was estimated to have no cost. The additional office equipment required by the firms con- sisted of an electronic calculator (estimated cost of $80.) and a file cabinet (estimated cost of $60.).23 22Heitger, "Criteria for Transfer Pricing," p. 139. 23Sears, Roebuck and Co., Fall and Winter Catalogyl973, East- ern Edition (Boston: Sears Roebuck and Co., 1973), pp. 921, 928. CHAPTER VI CONCLUSIONS FOR THE INVOICE METHOD OF COMPUTING THE VAT This chapter discusses and accepts or rejects each of the seven hypotheses for the invoice method of computing the VAT. Except for Hypothesis 1, each of the hypotheses is accepted as generally true. Hypothesis 1 1. It is not possible to determine the changes that a VAT would require within the accounting function of each firm subject to the tax. This hypothesis is rejected after examining each firm in the study. In order to identify the possible individual compliance costs ,of the VAT (Hypotheses 2 and 3, Tables 19 and 20) it was necessary to determine the changes in each firm's accounting function that the VAT would require. Certain changes will be required of all firms regard- less of the nature of their particular accounting function, for exam- ple, recording the amount of VAT billed by suppliers. Other changes are dependent on the amount of mechanization within a firm's account- ing function, for example, using the computer instead of people to cal- culate the VAT on each sales invoice. Finally, other changes are re- quired because of the individuality of each firm's accounting function, for example, checking of the sales invoices by some firms and not by others. 135 136 Firm A Description of the processing of sales The firm contracts for most of its sales prior to the start of each growing season. After receiving the shipping documents, one of two office secretaries prepares the sales invoice. Another office Secretary checks the sales invoices. The treasurer posts the ledger by hand for the sale and the receivable. Changes in the processing of sales necessitated by the VAT The secretary preparing the sales invoice could enter the additional information required by the VAT. It could be checked by the other secretary. The treasurer could simply add a column in his posting process for the VAT invoiced. Description of the processing of purchases The purchasing agent prepares all purchase orders. One of the two office secretaries checks the suppliers' invoices. The pur- chasing agent approves the payment. A clerk prepares the checks for the supplier. A check-advice is prepared unless the supplier has in- cluded a copy of his invoice to be returned. The check register is used to accumulate the information for posting the ledger. The trea- surer posts the ledger by hand. 137 Changes in the processing of purchases necessitated by the VAT The office secretary who checks the suppliers' invoices could also check the invoice for the VAT related items. The check reg- ister could be expanded to include a column for the VAT invoiced by the supplier, which would be completed by the clerk preparing the checks. The treasurer could use the total of that VAT column to post to the ledger. General Comments The firm indicated that the accounting personnel are not fully utilized. The firm has a computer, which is used to handle in- ventory and cost accumulation and it is not fully utilized. Conclusion The hypothesis is rejected for this firm. Firm B Description of the Processing of Sales For each job, the timekeeper posts the labor and materials to a cost card. The engineer and sales manager review and approve the cost card. An invoicing clerk prepares a sales invoice, and an accounting supervisor checks it. Weekly, the accounting machine operator prepares a sales journal and a customer accounts receivable ledger simultaneously. The sales journal lists each invoice as well as certain other information. An accounting supervisor uses the sales 138 journal totals in preparing the journal entry for sales and accounts receivable. The accounting machine operator posts the journal entries to the ledger accounts. Changes in the Processing of Sales Necessitated by the VAT The invoicing clerk could enter all the information required by the VAT on the sales invoice. An accounting supervisor could check the VAT-related information on the sales invoice. The sales journal and its program would need to be redesigned and reprogrammed. Columns would need to be inserted for rates at VAT rate 2, exports, and sales to Organizations whose purchases are not subject to VAT, as well as for VAT 1’ nvoiced at rate 2. As the present sales journal uses only eleven CO) Umns while the accounts payable uses fourteen, adding four columns shou'l d not be impossible. The accounting machine operator would post the amounts of the sale and VAT on each invoice in the appropriate 90) umns. The accounting supervisor would sum the total of the entries I“ the VAT column and in the three additional sales columns in the 53168 journal. These totals would be used in preparing the journal Bhtry for sales and VAT invoiced. Description of the Processing 01' Purchases The buyer prepares a purchase order which is sent to the Supplier. The secretary in purchasing checks the suppliers' invoices When received. Weekly, the accounting machine operator prepares a remittance advice and an accounts payable journal simultaneously. The 139 rem'i ttance advice lists the invoices being paid. An accounting supervisor uses the total of the accounts payable journal in prepar- ing the journal entry for purchases and accounts payable. The account- ing machine operator weekly posts the journal entry to the ledger accounts. Changes in the Processing of Purchases Necessitated by the VAT The secretary in purchasing would check the suppliers' invoi ces for the VAT-related items. The accounts payable journal Program would need to be reprogrammed to insert a column for VAT. When the accounting machine operator is preparing the remittance advi ce—accounts payable journal, the amount of VAT shown in each 5111391 "i er's invoice would be entered in the VAT column. The account- 1.119 Supervisor would add the VAT column shown on the accounts payable journai as the machine's registers are fully utilized. This total of VAT invoiced by suppliers would be used as part of the purchases journai entry. General Comments The treasurer indicated that his present accounting personnel are being fully utilized, with a number required to work 40-46 hours per week. He also indicated he is thinking about a small computer in Order to process his extensive job-costing system more efficiently. The changes necessitated by an invoice-type of VAT appear within the Capabilities of the present accounting function, although an invoice- 140 type of VAT might well require the firm to hire additional personnel or- to pay overtime to the accounting machine operator. Concl usion The hypothesis is rejected for this firm. Firm C Description of the Processing of Sales Most sales are via releases under blanket purchase orders from the customer. One clerk types the sales invoice. Another clerk checks the prices and extentions. The operator of the accounting mach'i ne (NCR 400) lists each sales invoice separately. The total is distributed to various accounts receivable and sales ledgers. The tom” 3 of the various columns of the listing are produced by the maCh‘i he and are used to post the ledger. Chan N Qes in the Processing of Sales eCeSsitated by the VAT The clerk preparing the sales invoice could enter the informa- tlcni required by the VAT. The clerk checking the sales invoice could Check the VAT required information. The NCR program would need to be reprogrammed. The new program would insert the contents of one column 1'Iito the miscellaneous column and put the VAT information in its place. A special column might be established for the export sales, or the miscellaneous column might be used. The accounting machine operator would have to post to the VAT column for every sales invoice. The 141 machine can accumulate the total of the column for purposes of post- ing to the ledger account. Description of the Processing of Purchases Two purchasing agents prepare purchase orders for approxi- mately one-half of the orders. The remaining purchases are purchases against blanket orders. A clerk checks the suppliers' invoices as they are received. He also indicates the expense breakdown. The accounting machine operator lists for each invoice the number, amount, and the distribution to various accounts. The totals of the various columns are used to post the ledger. The invoices are accumulated by SUPPT '1 er. When the clerk prepares a check, he also prepares a voucher that 1 ists the invoices being paid. Changes in the Processing of Purchases Necessitated by the VAT The clerk who checks the suppliers' invoices could check the “”01 ces for VAT related items. The NCR program would need to be re- pmQranrned. The new program would insert the contents of one column into the miscellaneous column and put the VAT information in its P1 ace. The accounting machine operator would have to post to the VAT cOlumn for every supplier's invoice. The machine can accumulate the total of the VAT column for purposes of posting to the ledger. General Coments The firm uses a NCR Century 100 computer to accumulate standard and actual costs as well as inventory quantities. The 142 computer is used 20 hours per week. Conclusion The hypothesis is rejected for this firm. FirmD Description of the Processing of Sales Upon receipt of an order, the clerk in sales prepares a customer-order-received slip. The shipping clerk initiates prepara- ti on of the sales invoice at the time of shipment. The clerk in sales completes preparation of the sales invoice. Monthly, amounts are taken from the sales invoices to prepare the journal entry to record sales, freight, etc. The journal entries are key punched and a computer (IBM 360-20) is used to maintain the ledger. Changes in the Processing of Sales Necessitated by the VAT ' The clerk in sales could enter all the VAT-required informa- Monthly, he could also sort the invoices, These tion on the sales invoice. total the sales by type of sale, and total the VAT invoiced. totals would be used in preparing the monthly journal entry. Description of the Processing 0f Purchases The purchasing agent initiates or approves the purchase order. The C 1 erk of the purchasing agent checks the supplier's invoice when it 143 The key punch operator prepares an account-liability Weekly, is received. card and an account-distribution card for each purchase. the liability cards are sorted, and the ones due are paid. A check- advice is prepared showing the invoice numbers, amount, etc. The entries in the ledger are run from the cards. n-‘h‘ “hi-1 ...' Changes in the Processing of Purchases Necessitated by the VAT The clerk of the purchasing agent could check the VAT re- The layout of the account ‘T lated items on the suppliers' invoices. distribution and liability cards would need to be altered to include col umns for VAT invoiced. The program for checking the total for b0th of these cards would need to be rewritten. The key punch Operator would have to punch the amount of VAT invoiced on each pur- chase. The computer would require additional time to run the entries fo r the ledger. General Comments The firm indicated that its accounting personnel are not underutilized, although no overtime has been required for two years. The computer is underutilized, as the firm indicated that it is doing some computer work for other firms and the firm is looking for addi- tional computer work. While some computer reprogramming will be re- qu‘ir‘ed , it does not appear to be extensive. The other changes required are reasonably simple. 144 Conclusion The hypothesis is rejected for this firm. Firm E Description of the Processing of Sales til-“ox l Clerks in sales receive the customer order to which they assign a customer number and an invoice number. Key punch operators Prepare a header card with the customer and invoice numbers. For each item ordered, a card is prepared showing the item number and quantity. A computer (IBM 360-20) using a master price-file punches the description and price into each detail card and prepares a ship- D'ing order. After the goods are shipped, the header and detail cards are used to prepare the sales invoice and a total card is prepared for the invoice. An invoice listing is prepared which is used by accounts receivable. Totals are taken that form the basis for the Journal entry for sales. The computer is used for maintaining the ledger. Changes in the Processing of Sales Necessitated by the VAT The VAT would require that the computer be reprogrammed. If the products were taxed at more than one VAT rate, the product item "(Where in the master price file would need to be coded as to the rate of VAT applicable. The customer file numbers of customers represent- ,"9 exPorts and organizations whose purchases are not subject to VAT 145 would also need to be changed to reflect their status. The program for the preparation of the sales invoice and total card would need to be changed. On each order, the computer would need to check the cus- tomer file to see whether the customer is subject to VAT. The computer would also need to check the product code number for the VAT rate applicable. Having done this, when the computer prepared the invoice it would do the VAT percentage calculation and entry on the invoice and also punch the amount of the VAT in the total card. The invoice listing would need to be altered to include listing and accumulating the amount of the VAT. Description of the Processing of Purchases Purchase orders are prepared and sent to the supplier. When the supplier's invoice is received, clerks in purchasing check it. Clerks in accounts payable again check the supplier's invoice and supporting documents. The clerks in accounts payable accumulate the invoices by supplier. Monthly, for each supplier, a simple voucher check is typed listing each invoice paid. Manually, each check is entered in a sumnary journal which lists the check number, amount, and expense distribution. The totals of this sumary journal are the basis for a journal entry for purchases and expenses. ghanges in the Processing of Purchases ecessitated by the VAT Since the supplier's invoice is presently checked twice, it "007d probably continue to be if a VAT were adopted. Thus clerks, both - "and “.1 146 in purchasing and in accounts payable, would be required to check the invoices for the VAT-related items. The clerks in accounts payable, when they prepare the voucher check, would have to enter the amount of VAT for each invoice and also total the amount of VAT in each voucher check. The clerk who posts summary journal entries would have to enter the VAT and take the total of the VAT entered. This total would be part of the journal entry. General Comments The firm indicated that its accounting personnel and com- puter were fully utilized. They also indicated that the firm did the accounting work of three related companies on a fee basis. Neither the personnel nor the computer were utilized outside of the usual working hours (8-5). While an invoice type of VAT would re- qui re extensive revision of some of the firm's computer programs, the reprograming would apply only to the processing of sales. Since the fi rm already has familiarity with computers and their technology, the reprogramning should be within the firm's capability. The VAT might require additional people and/or overtime and possibly, but not Probably, the use of a larger computer. Conciusion The hypothesis is rejected for this firm. Tun—u‘-I’T:N \ - u "~. 147 FirmF Description of the Processing of Sales Sales orders are received via teletype from the branches. Sales are also made from the main office. Three clerks in the sales department price the order. This consists of determining if the E.- pr-ices stored in the computer for that customer will be overri den or E not. The order is key punched, and the punching is not verified. The computer (IBM 1130) prepares a shipper proof, which includes the J prices, but not the quantity of goods shipped. The same three clerks usually check these shipper proofs. After shipment, the quantity shipped is key punched into the cards prepared earlier, as are any exceptions. The computer prepares the invoice, including calculating any discounts that are applicable. Two clerks in accounts receivable scan the prepared invoices. The computer accumulates the information required for posting the sales and the various customer receivable accounts. The firm's ledger is maintained on the computer. Changes in the Processing of Sales Necessitated by the VAT The computer programs for processing sales would need to be 31 tered. As all of Firm F's sales subject to VAT are expected to be taxed at the same VAT rate, the product code numbers would not need to be altered. Customers whose purchases are not subject to VAT would r'eed to be so identified. The program for preparing the sales invoices wOuld need to be altered to include the VAT calculations, etc. It 148 would also need to accumulate the VAT invoiced, the sales subject to the VAT, and the sales to organizations, whose purchases are not sub- ject to VAT. On sales, the amount of VAT invoiced for each customer could be accumulated by customer file. Description of the Processing of Purchases Copies of the purchase orders and the suppliers' invoices are sent from the branches to the main office for payment. Two clerks check the suppliers' invoices. The invoices are accumulated by supplier and paid weekly. An accounting machine operator prepares a voucher check for each payment. The voucher check lists the invoices and amounts being paid. One copy of the voucher check goes to a clerk who uses it to post the general ledger. Changes in the Processing of Purchases Necessitated by the VAT The two clerks who check the suppliers' invoices could check those invoices for the VAT related items. The accounting machine PY‘OQram used in preparing the voucher checks would need to be re- Pl‘Ogrammed. A column would need to be added for the VAT. The account- 'IDQ machine operator, in listing each invoice on the voucher check, Would have to insert the amounts of VAT. The accounting machine could tOtal the VAT on each voucher check and also the total VAT on all the Voucher checks. The total of the VAT could be used by the clerks to Post the ledger. 149 General Comments The controller indicated that the accounting personnel were fully utilized, but he also stated that currently accounting personnel did not work overtime. The firm has had experience reprogranming existing computer programs, particularly those concerning payrolls. r While an invoice-type of VAT would require some rewriting of computer ' [Jrograms, it appears that the firm has the personnel and experience tn) perform the reprogramming. The other changes required are quite simple. E! Conclusion The hypothesis is rejected for this firm. Conclusion for Hypothesis 1 For each of the six firms it is possible to identify the iridividuals who would be affected by the VAT and to describe in general terms how these individuals' tasks would be altered. The hYpothesis is therefore rejected in general for the invoice method 01" computing the VAT. An Implication of the Finding for Hypothesis 1 One of the arguments business might use against the adoption of a VAT is that it would require a major change (defined in chapter 2) Within the accounting function of firms and that firms would simply be uhable to comply with the tax. It has been shown that the VAT will 150 require additional time of accounting personnel in each firm, and this in turn may require additional persons to be hired. In those cases where an accounting machine or computer is used in the processing of sales and/or purchases, the programs will have to be rewritten, tested, etc. Although machine reprograming is time consuming, it seems well within the experience-capabilities of the firms involved. It can be said then that the VAT would not require a major change in any of the six firms studied. Hypotheses 2 and 3 2. The total initial compliance costs of a VAT can be broken into components that can be described in terms of informa- tion readily available to a firm's accountant. 3. The total continuing compliance costs of a VAT can be broken into components that can be described in terms of informa- tion readily available to a firm's accountant. The listing of possible initial and continuing compliance Costs follows (Tables 19 and 20). Based on the listing, Hypotheses 2 arud 3 are accepted for most, but not all of both types of costs. Information that is readily available to a firm's accountant was defined in chapter 2 as information that the accountant would know already, to which he would have ready access, that he could deter- "filie easily, or which he could be expected to estimate reasonably. The l'TFormation necessary for the accountant to estimate the individual Costs for his firm was discussed in chapter 5 (Estimating the Changes Required in the Accounting Function). The information necessary to COSt each component identified and the availability or non-availability of that information is summarized below. The general availability of 151 tflie information was the basis for accepting the Hypotheses. Information concerning wage rates of the firm's employees are readily available to the accountant from‘within the firm. Bill- ing rates of outside suppliers of goods or personnel services (e.g., CPA tax advisors) the accountant can obtain from the supplier. The number of goods (e.g., calculators) or the frequency an action is to be performed depends on how many of an item the firm currently owns, its volume of accounting activity, or the VAT law. The accountant can be expected to know or have ready access to these items. Estimates of the additional time involved for each person affected could come from several sources. The accountant, computer programmer, and accounting machine reprogrammer could estimate their own times, and employee time may be available from standard time data (e.g., Table 13) or estimated by the accountant. Information is not readily available for certain time estimates as the accountant has little data on which to base his own estimate and no other sources are available. Time spent with a government VAT auditor is an example. “The information necessary for the accountant to estimate his compliance costs may come from a variety of sources, but in some instances there may be little basis on which to make the estimate. The list of compliance costs reflects the changes required in each firm, described in Hypothesis 1. The list also includes costs resulting from changes that may be required of some firms, although none of the firms in this study were required to do so, for example, can ve rting cash registers . 152 In the list of compliance costs each of the possible costs have been identified with a three-digit number, followed by one of the code letters explained in Table l6 below. For personnel costs, the letter indicates the source of the addi- tional time estimate, and for non-personnel costs, it indicates either the source of the cost of the item or of the number of items. The possible compliance cost is then described. Under the description of those costs estimated by the researcher is the researcher's estimate (discussed in chapter 5) of the time (abbreviated T) or cost required. The dollar amounts of each individual compliance cost for each firm are separated and coded according to the category of individuals to whom the cost estimate relates, as described in Table l7. Within the list, the individual compliance costs have been grouped by the sequence in which the cost would likely be incurred (summarized in Table l8). The total dollar amount of estimated compliance costs for each firm are summarized in Table 22?. 153 Tkable 16. Code Letters Indicating Source of Personnel and Non-Personnel Dollar Cost Estimates Source of Estimate by Type Code of Cost Estimated Letter Personnel Estimates solicited from the firms interviewed A Estimates developed based on standard time data B Estimates by the researcher, which have narrow bounds C Estimates by the researcher, but the researcher feels that the information probably is readily available to a firm's accountant (see chapter 2, definition 10). D Estimates by the researcher, and the researcher feels that the information probably is not readily available to a firm's accountant E Non-Personnel Estimates solicited from a business firm J Estimates by the researcher, but the researcher feels that the information probably is readily available to a firm's accountant K Estimates by the researcher, and the researcher feels that the information probably is not readily available to a firm's accountant L Note: The accuracy of the estimate decreases progressively within Personnel from A to E, and within Non-Personnel from J to L. 154 Table l7. Code Letters Indicating the Persons or Firm to Whom the Cost Estimated Relates Individual(s) or Firm Code Letter Head of marketing in the firm interviewed Accounting employees of the firm interviewed Treasurer or controller of the firm interviewed Individuals occasionally hired by the firm interviewed - CPA tax-advisors and accounting machine reprogrammers Firms supplying non-personnel items to the firm interviewed 155 Tkable 18. Summary of Possible Compliance Costs for the Invoice Method of Computing the VAT Number of Individual Code Number and Description of Costs the Type of Cost Estimated 100 Initial Compliance Costs Total = 75 110 Prior to Start of VAT Year 111 Gaining Familiarity With VAT Requirements 3 121 Relating the VAT to the Firm 12 161 Designing the Necessary Accounting Procedures 13 201 Determining the Effect of VAT on Individuals in the Accounting Function 3 215 Reprogramming the Machines 216 For an Accounting Machine 5 236 For a Computer 9 276 Converting Other Machines 1 285 Training of Employees Concerning the VAT 286 Determining How 1 296 Designing the Content 1 306 Conducting the Training 7 331 Purchasing Additional Office Equipment and Redesign Forms 5 351 Miscellaneous Actions 7 371 Registering for VAT 2 380 During First Year 381 Miscellaneous 6 «400 Continuing Compliance Costs Total = 119 410 Annually at Start of the VAT Year 1 420 Related to Sales 421 Inserting on Sales Order 1 425 Related to Each Sale (Non-Computer Processed) 426 Related to Preparation of Each Sales Invoice 26 516 Checking Completed Sales Invoice 13 536 Related to Each Sales Return 1 546 Related to Posting of Sales 3 156 'Table 18. Continued. Number of Individual (lode Number and Description of Costs 'the Type of Cost Estimated 565 Related to Each Sale (Computer Processed) 566 Input into Computer 2 576 Processing by Computer 4 596 Output from Computer 1 620 Related to Purchases 621 Indicating on Purchase Order 1 631 Checking Supplier's Sales Invoice 13 651 Indicating on Supplier's Invoice 1 661 Related to Preparing Payment Vouchers 5 671 Related to Purchase Returns 1 681 Related to Posting (Non-Computer Processed) 2 695 Related to Posting (Computer Processed) 696 Input 2 706 Processing 3 720 At Various Times Through the Year 721 Determining VAT on Self-Deliveries 731 Related to New Employees and Their Training 751 Related to All Employees 771 Detection of Errors 781 Correction of Errors 791 Executive Attendance at Meetings Concerning VAT 801 Planning to Reduce Tax Impact 811 Reassessment of Decisions 820 Periodically - Monthly 850 Periodically — Quarterly 870 Annually - at End of VAT Year C) Annually - at End of Financial Year 890 Annually - After End of VAT Year 930 Miscellaneous 980 Compliance Cost Savings —J -4—-Ioo4> __l \ 157 ev.mm o m¢.P me._ on.— o mp.¢m o o o mm.~ mm._ mm._ mm.~ mm._ oo.oom oo.omp oo.mm oo.oo~ oo.om mm.m¢ mm.m mm.mm «0.x N mm.—F mm.mm mm.mm w— mm.mm mm.mm —m.mm mm.— oo.o¢ mm.mm wo.~m_ OD: .mpww cmEOpmao asp mcwc_5mxm an umcwEngmu ma vF=ou mwzh .Lmeopmzu emu .omm m + .cws muh Ah<> saw com cau_o>:P an co: ___: was“ uses p<> op pooh gnaw no: men mommguczq mmocz mcowumNchmco mew mgmsoumau .x:m w_ .;u_:3 mcwcwecmumo uwmp .mmpmc even no: .ngm cmpzuwp icon m op >_aam u_:o3 N own; so F mum; um p<> .mzowcmmoso; mew suspm mwcu cw as?» sumo mo mpuauocq ugh .cwe anhuwevp m__mm ELF; we» cows: muw>gmm wcm noon comm com Auqsmxm co .N mum; ._ mum; .oLmNV H<> mo mum; wPamuw—aqm asp unwavecmumo UNNF as?» an“ op H<> may mcwpm_mm _NF :owumpmwmmp we“ mo cowpmpmcqcmpcw m.Ewa mcu smwcm> ow somw>cm xmp c0\ucm one mcwccmocou mmcwumme pm mucmucmpum m>wpaumxm <¢FF cowpmpmwmmp mnu saw: suvcmw_wsmm swam op mcwnmmm we“ =u_3 spwcm__ssmc macawmu ___ pumwmm xoou H<> we“ mumu wcu op maow>wca .moco caucw upzoz Esme m gown; mumoo mucm__aeou o__ mumou mucmw—aeou mepwcH oo_ m m a u m sew; s5 H:=OE< cmppoo mmpapmm mumswpmm “moo egg 50:3 op mcwpausccH muoo cmppms new .cowqucummo .cm3232 smog mocm.~qsow .H<> a m=_u=QEou so cospmz mu_o>=H we“ age mpmoo mucms_qsou _©_c_=c mwa_mmoa to cm_s .m_ mfiomh 158 ww.~ m_.m mm.¢ w~.w w_.m mp.m om.m ~¢.m NN.¢ mm.p mm.P mm._ mp.w mm.— mm.” .mowpumca on» mzcwucou op mmcmmmu ncm mucaooum mmme mFpr_=e mum: appcmcgao sewm m e? umuwmc an “cows mucaouum mgoz .mucaouum rm _Fm mm: upsoz EL?» sumo wasp amazmmm mm: an .pcaouum can .cws Nuh a An mpnm» mmm .mpczooum Pm umos umv meuwp asp cw umcwzcmc mpczouom 3m: ms» mcwcwegmpmo upwm Lowraazm mg» mcmcwsmxm an uwcwsgmumu an c_:ou mwch .cmwpaasm can .umm m + .cwe muh Ap<> com Esme may mcwowo> o in? ma ac: _pwz mung ncmv h<> sage unamxm so umns; osmN mew cups: mcow¢m~wcwmgo mew msmwpa a -azm m.egww 6:» co .zcm e? .suwzz newcwscmpmo N mum; h<> um uwxmp omen» new — mum; h<> um umxmu «was» can? awnmcmamm x_wmmm mew suzum mwsp cw mecww asp s5 nwmmgu -Laa muoom mo mmwcommumu och .cws opu» mommnugza Ecm+ mgu gown: muw>cmm 0 egg uoom some so» Agaemxm Lo .N mpg; ._ mums .ocmNV H<> so one; m_nmuw_anm on“ mcmcwsgmumo m~_* Ecowgma xpmzom -cmppsewm npaoz ¢N_% umecomcmq can: .cwe one o Ampmm wcp co cmuumF—oo H<> o: m>mc __wz was» ucmv mucoqxw men a mmpmm m.ELw$ asp mo .xcm mp .guwzz acmcwesmgmo uwmp ummp umm_ oom— o u m sewn An uczoe< cm~_oo mmpmpmm mumswumm “moo asp son: on mcwpmuwucH muoo cmppmg use .cowpawcummo .LmnE=z pmou mucmwfiqsou .um==%~=ou ll .2 m3"; 159 nw.¢ mm. m_.w nm.e mm.m mm.m mm.N mm. mm. mm. mm. mm.F mm. .pcasaooo asp co oacmwmaoac an ou sap? 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Q Q. .maoso>os oammaooso sapooeoouooo cco sao .oso mus omsaeopmoo so asaspooom so maaAopoEa ooo Ampoooooo apos As p<> asp op oospmoo .maoso>op mapom oo oosp -o—ooooo o<> ..o.ac Esss asp so maaAopoEa As aooe asaz sass; msossa maoopoos msspv p<> asp As camooo ssoz oospoooooo op oapoapao msossa so oospoassoc .maoso> nos oammaooso sapooEoouooo cco sao .ose mus ompoooooo saooa— oaoso>os o<> asp so oopop asp spsz aasoo poo maoo saeopmoo As oaopo>os p<> so moospmso pooooo posoasm asp so _opop asp ..o.av p<> asp op oapopas msossa so oospooos oospoooooo asp os amooo asp so oospoapac .mmms : ocms op cam: aaAooosa so Asooapoo sao soos pus pana>ososs aooos -sossao ooo o<> asp Eoss oospoomas moaososo oos wowo m—oo -osauooo oosososp o: sopoos usoossao oosoopoooc cmmo .msoposaoo sooooAas oosooooxa .mmms . ocms os cam: aaAopoEa sao msoos mus omsasoooom As aooo masopmpe oapopas p<> ..o.ap aaAopoEa asp As oappomsos oaap mos sazmoo amosz so oosososp s<> op oasa>oo poo amosp oosooooos s<> oososaoooo moospmaoo oossazmo< como s m c c c < Esss As pooos< soopoc aapopas apooppac paoo asp ooso op osspoososp aooc sappas ooo .oospossomac .sassoz pmoc aooospoEoc ll" .oaoospcoc .om assoh 192 mo.mo co.oo co.o mm.mo mo.mo mo.mo mo.mo mo.mo mo.mo mo.mo co.co mo.mo oo.o co.o oo.o co.o mm.mo mm.mo mm.mo mm.mo mo.m_ co.mo mo.mo oo.o mm.mo c o z c .c xsooaoo< Eoss oaoooa>ao mo: p pocoooo saooap sooa sos oaosoposoo poo ms aooopos oosooos o ss .p<> op oapopas mpoooooo saooap asp so aooooos asp oosooss cmmc AsoaA sao mp oaosossao as coco: mmcs ooo cmcs ooo .soaA sao aassp so oaosossao as ooooz cmcs . mmcsc Apspsoz - Appoosoopsas omo .mscos ous oassp so oossao o sos aooapmsxa os oaas mos o<> asp sapso zas> -as aoo pmoao po assooas op oapoaoxa as ooo moosm usoao oososso ooo cosmososoo m.ssss asp oo o<> o so poassa aspv oospooos oospoooooo asp aosmpoo _aooomsao As moosmsoao osopsao so poaommammoac mpoc .sasomoasp sos asoos o .ssapo sos msoos mus poooos xop asp aoooas op mo om cosooopo ooo aos>sam xop so Aoopm ooo .aos>sam oospossomsom xop op oososs c—cc .sascmoasp sos msoos mus oospopasosapos so oospoomsoao s<> op maoooso asp sooooo .moaososo mps ooo o<> asp oososaoooo moospaao po aoooooappo a>ppooaxc cooo m c c c oops As psoooo soppos mapooac apoospmm pmoc asp Eosz op oospoosoop aooc sappas ooo .oospossomac .sasooz pmoc aooosposoc l‘ .oaosspsoo .om apsos 193 .coms aam .sapooooo o am: sass: s ooo .c .c wasps sos cm u pmoc .oam: asaz mpoooooo oapooas s<> _m poo oaoomm< .mo assop sao poooooo sao .ope m.us o o o o o o m H<> asp 0p c aoo mpoooooo saooao pooospsooo asp so amoooas c c c c c oc.om aesp pooospsooo massooas paasm aooooos o ooo c c c cm.c cm.c c o .poaoapopm aoooos oo .aooooos possp o oossooaso ¥.cmmc .sp apsop sas .sso pup as. so. as. as. as. so. s psas -osa>oo asp op p<> asp so panAoo asp sos soaso sasooo> so .aoso>os soaso .soaso asp oossooaso ccmc .mp apsop sas ..sss sup c cc.ms cc.m_ cc.mp cc.mo cc.m_ c Aosps asp op oapsoe ooo posss poaoosa>oo asp As oasooaso Aooospsoo as psoso msspv osoo s<> so pocoEo ooo .sassoo oospospms -oas s<> .ano m.Esss asp oospoosoos panAoo asp Aooosoooo op Esos panosa>oo sasss o oospaooeoc cmmc .mo assop sac ..osE mus o op.op op.o_ op.op op.o_ op.op o Apsaossa>oo asp op osoo pos asap mapsspoooao pop asap mm oso p mapos mosopas aospoos oo s<> ooo .m ooo _ mapos mapom aospcosuooo oo s<> .m ooo _ mapos mapom oo.m o o o c 0 CL mc.c c c c c c o aospcos oo s<> u oaoso>os o<> so Eons panosa>oo asp op opos as op p<> so psoooo asp ossssosapas coma a s s o s o aapopas apoospao paoo asp ooss op osspooposp Esss As poooE< soppoc aooc sappas coo .oospossomac .sasEoz pmoc aooosooooc .oaosspsoo .om apsop 194 .apos ssopoo asp so aosm saspsa sos mauso>os .msaspooom ompo oso sapso om op op apooasoa Aasp posp oapooso -os mosss aso .panoooo sao .oss p u oasommo p oaosuosoo poo oo soaA _osooooss m.ssss asp ooo soaA p<> asp c c c c c oo.o c so ooa asp ss oassooas as ooooz psv omassa>soao -spam ooo mamososoo sos Aosopsssm .oossao pxao asp op oapsooas as ops: ooa soaA asp sapso mapom oc.o mm.c cc.c c c c o sos mauso>os oo p<> asp oossomos .aposoxa sosv soaA p<> asp so osa asp po sso: sso-poo ossosossas omoa soaA p<> asp so osa asp po - Appoosso oso .mosopas xop asp masoo -aso soc ops c ssss soo .mp assoo sao .oso mmuo o o o so.mo o o s Assop o oo.om oo.om o oo.om oo.om o -as asp osssoaso oso osos asp osspapsooo aaooposs oo.mp o o o o o s asspc sp asoopsc ssopas s<> Apsapsooo asp osssooass ooso .mp assoh sac .aoso>os sao .ose cmom. + poooooo sao .oso ooom. up mpoooooo aosspoaoooooo spsz wasps amosp soo oc.o so.p o o o o s so sapooso ss oasssomaoc p<> assoospooo asp ooszosm sso oappssz mpoooooo apsspoapoooo: asp sos apooasom o oossooaso cmmc osoaA sao aassp m oassossao as ooooz omcs ooo mmcsv Assapsooc . Appoosoossao cmc s o s o s s maps—as apoospao paoo asp ooso op osspoososp Esss As poooo< soo—cc aooc sappas ooo .oospossumac .sassoz pmoc aooos—osoc llll .oaoospsoo .om apsop 195 .aooe as coco: sopszm o soom posp oapoosospoo Aoopm ossp op mosss asp so aooz o o o o o o o so sapooso ss oasssoa -ao .pammo posp oo aosspoooao s<> asp op aooo as pace poaspmomoo a>spooospas o oasp oasops3m oaas a>os mpammo ssv maos>sam so moooo poEaxa so oospooooso asp so am: oooomsao op soaA asp cos -soo oasopszm oaas a>os osopas o<> asp oo oapocoao ooo osoo mo; s<> sass: oo mpammo Aoo ss aososapac c.os sao .ose mmom. + poooooo sao .ose ooom.up o o o op. o o . o pss apsoospooo asp osszosa sso sappssz om.p mm. c c c c o mpoooouo apsspoaopoooo asp sos aoooasom o oossooaso cmom soaA o<> asp so ooa asp sapso . Aoooooo< com .Apoo assp oasooooAas mo: mssp asapoosoo spsz wasps soo .oaosossao ss c xsooaoo< oo oamos mo: o mo. mo. mp. c c c o s<> asp As oassooas mpoooooo saooa— asp cosmopc cmmm . .oaoooasom poaooooo sao .ose m. u oasommo o c c c c c co.m c Apaasm aooooos asp oo poooooo Apspssosp o<> asp o: oosppam maooooos ooo moms os oasssomao posp asso as ooooz oassooas sso: aspc soaA oosooooss oc.o oo.o mo.o mm.m p_.m c o m.osss asp so ooa asp po sso; ssoupoo oososossao comm soaA oosooooss m.Esss asp so ooa asp po - Aoooooo< cmm a a s o o o sapopas apoospao paoo asp soss op osspoososp Esss As poooo< sooooc aooc sappas ooo .oospossomac .sase:zipmoc aooopooeop .oaosspsop .oN assop 196 oo.om oo.om cc.cm oo.oo oo.oo .po.op o o oo.o c mm.m o c c o om.m oo.om mm.mp c mm.oo c mm.m c mm.m o c c o mo.mm mm.mm m—.m o .soos sao .cmm po pmoc .msoos moo mus cc.cm cc.cm cc.cm c ompoooooo s<> asp so maooooos asp oosAsssa> .maoso>os maoom asp oo moospopooooo s<> asp oospmap ..o.ac s<> sos oospoooooo m.Esss asp oososaoooo soamess Asap -pom op saoso op mooo so aoso> -os sao .oss omoc. + sasoooom sao .oss ocom.uo om sapooso op oasssomaos saspooom As oaoso> -os o<> so oospms— oooooo _osoaom asp oossooaso .mp.ompp upmoo m.s ssss ooo mo.mmomupmoo m.c Esss ooos As aooo so .moms aam .cpupmoo om aooo so .oos -pmsp asp asooaso ooo oospoEsosos asp apooosoooo op msapooooo spasp am: oocoo s ooo c wasps .mp assop sao .aosoopoooo ss aEsp oospsom + aoso> -os sao .osE omoc. + sanpmoo sao .opE ocom.uo m Am sapooso op oasssomaoc sanpmoo As oaoso> mo.m s. -os s<> so oospmso pooooo oosoaom asp oossooaso x c mm.m o .mosopas xop asp masoo -aso sso ops o osss sos .mp apsop sas .spo soup oosop sas asp oossoaso ooo Esos asp oospapoooo maoopoos msspv op asoossv osopas s<> oooooo asp oossooaso 0.00: cmoo .cmom cmmm s c c c < Essa As psoooo soppos aapopas apooppao paoo asp ooss op osppoososp aooc sappas ooo .oospossomac .sassoz pmoc aooosooooc .oaoospooc .om apsop 197 co.m co.m mo.m co.m co.m 00.2 00.2 8.2 8.0.. cc.c— co.mo co.mo co.mo co.mo co.mo co.mo m .cm" msossa so poassa pao oaoommo oosp noooao oo a>paoas ops: ps sass3 sos o<> osoo mms pp .osss asp oo poassa a>spooao o mos amososoo posp oo oaoso>os s<> asp pocooo asom asp As oososooassao no: ooo amososoo o oo o<> asosas oopop asp ooposoo -assa>o .aooooxa sosc ossss asp oo poassa a>spsmoo so a>spooao o a>os cocoa amaspv msossa oapoapaooc smmo om sapooso aamv msoaA co oospmoo paossoo apps o sos .ccmupmoc p<> asp As Apaoom oassoo -as mpoascooo saspo ooo moscpas o<> asp oososopac xmmo .soaA sao .cpmupmoc Amosoo saooap ..o.av mosos oospoooooo pooospsooo cosmososoo somo .mmms oo oamos cmupmoc mosos saspo so .mosos aossooo oospoooo -oo .maopvos maoom saosoo so xaoooou asos oosposso xmmo .Am sapooso aamc co.momupmoc omsposss pooospoz so ooasoc so .amoo: oos -soapc aosaeooc .opo: aospoaso As oaos>oso amosp mo soomc p<> asp oo aos>sam oospossomsom o cosmososoo cmoo s m c c c Essa As psooss soppos mapopas apooppas pooo asp oosz op osspoososp aooc sappas ooo .oospossomac .sasEoz pmoc aooosooooc .oaosspsoo .om apsop 198 m—.moom mo.mmom mm.mmo mo.osm— mo.mmms os.mmm msmoc mcz asp so ppomas o mo Aoopm m.psp op Esss Aoo sos oaosaomso asaz moos>om pmoo so aosp oz o o o o o . o s oosp>oa poop aosospoooo oomo .moos so oaaos osupaoo c c c c c c m AEsss asp op pmoo pospoapoo o ms msspv zoo s<> asp spsz Apoeoo op asoppos op aoo pmasapos ooo mapppooao so panAoo smoo .mooo oo oamos Omupmoc o o o o o o o sesss asp op paoo c c c c c c c pospoapoo o as msspc s<> asp oososaoooo oospoospss mooo .oso cup .oapsooo poo as ooo zoo o<> spsz mappoooo Appos Esss anomm< c c c c c c c Aaooaoooomassoo ooo pmaoo -as m.poaoosa>oo asp po opoo ooo mosooas oossaspoo aosp maooooos osspc mamoosoo p<> sos Esss asp cos c c c c c c o uppooo poaoosa>oo so ma>ppopoamasoas spsz oospoomooc cmoo .cmupmoc .mmaooso oosmsoao msaeopmoo op oossapooes cascmm< c c c c c c m Amoosp -opoopoo aoopoaosao asp oosoo so o<> so apos aosoo -soooo asp oopoosmmo os .aooooxa sos .msossa oossoo sass asp As oapoaso as Aoo apspc ppsz ops saoopaoo sooo s o s o s s aapopas apooppaa psoo asp ooso op osspoososp Esss As poooo< sopooc aooc sappas ooo .oospossomac .sasooz pmoc aooospoooc "l lIH ll “l "ll .oaosspsoo .om apsop 199 Conclusion for Hypothesis 2 Seventy—five possible individual initial compliance costs for a VAT computed by the invoice method are identified in this study. The information to estimate seventy-two of the costs is readily available. However, the information to estimate the other three costs (related to personnel, coded letter E, and numbered 382, 384, and 386) is not readily available. As the information is readily available to a firm's accountant to estimate 72 of the 75 identified costs, Hypothesis 2 is accepted as generally true for each firm in this study and as true in general. Conclusion for Hypothesis 3 One hundred and nineteen possible individual continuing compliance costs for a VAT computed by the invoice method are identi- fied in this study. The information to estimate one hundred and three of the costs is readily available and the information is not readily available for sixteen costs (coded with letters E and L). Of these sixteen costs, seven (numbered 734, 736, 738, 752, 754, 756 and 791) concern employee performance and supervision, four (numbered 771, 781, 962 and 964) concern errors resulting from the VAT and ill— will created, three (numbered 972, 974 and 976) concern a government VAT compliance investigation, and two (numbered 801 and 811) concern reassessment of certain decisions within the firm. As the informa- tion is readily available to a firm's accountant to estimate 103 of the 119 identified costs, Hypothesis 3 is accepted as generally true 200 for each firm in this study and in general. Hypotheses 4 and 5 4. A dollar amount can be estimated accurately for the VAT initial compliance costs identified in Hypothesis 2. 5. A dollar amount can be estimated accurately for the VAT continuing compliance costs identified in Hypothesis 3. The amount of time required to make an estimate and the lack of data on which to base an estimate are the primary reasons that the cost estimates of an accountant would vary in accuracy. The code letters in Table 16 indicated the source of the personnel and non- personnel dollar cost estimates shown in the list of possible compli- ance costs, Tables 19 and 20. These code letters also indicate the accuracy with which the compliance costs can be estimated. The in- formation is readily available to a firm's accountant for personnel costs coded A, B, C and D and non-personnel costs coded J and K. An accountant could estimate his firm's dollar costs using the same cost estimation process as this study (discussed in chapter 5, preparing the cost estimates). Because the time or cost estimate would fall within narrow bounds on either side of the expected true value and/or standard time data is available, the costs coded A, B, C and J can be estimated accurately. Information for estimating these costs number nearly three-quarters of the initial compliance costs identified and of the continuing compliance costs identified, see Table 21. 201 Table 21. Number of Compliance Costs for an Invoice-Type of VAT by Source of Estimates Number of Number of Code Initial Continuing Letters- Source of Estimate in This Compliance Compliance Per Study and Its Anticipated Costs-per Costs-per Table 16 Accuracy-per Table 16 Table 19 Table 20 Personnel Dollar Cost Estimates A Firm interviewed, accurate 4 0 8 Standard Time Data, reasonably accurate 0 62 C Researcher, accurate within narrow bounds 48 24 D Researcher, inaccurate because subject to wide variability 15 3 E Researcher, inaccurate because information is not readily available to a firm's accountant 3 l3 Non-Personnel Dollar Cost Estimates J Firm interviewed, accurate 3 l K Researcher, inaccurate because subject to wide variability 2 13 L Researcher, inaccurate because information is not readily available to a firm's accountant lo I... TOTAL 75 119 202 For the costs coded D and K the information is available to the firm's accountant, but his estimate is not expected to be accurate because it would be subject to wide variability. The estimate of com- puter reprogramming time is an example. There is no standard time data the accountant could turn to that would be completely applicable. Increased accuracy of his estimates can be achieved with increased costs in the form of increased time and effort by the accountant and his staff. An accountant in a firm would prefer to spend his time performing the task rather than estimating how long it will take him to perform the task. Thus, the cost of making estimates can inhibit accurate estimates. 0f the initial compliance costs identified, fifteen are coded D and two are coded K. Nine of these initial costs (numbered 239-263, and 334) are computer related and firms without a computer could accurately estimate them at zero. 0f the continuing compliance costs identified, three are coded D and thirteen coded K. Ten of these continuing costs (numbered 577-597, 707-709, 832 and 898) are computer related and would be zero for firms without a computer. Firms with computers have more than twice as many identified costs subject to widely variable estimates as do firms without computers. For firms with computers this is less than one-fourth of the number of initial compliance costs, identified, and less than one-seventh of the number of continuing compliance costs identified. For the costs coded E and L, the information is not readily available on which the accountant could base an estimate and therefore estimates of these costs would be accurate by chance only. Three 203 initial compliance costs were coded E and L as were sixteen continu- ing compliance costs. Conclusions for Hypotheses 4 and 5 Individual compliance costs can be estimated with varying degrees of accuracy. For a majority of the individual costs the hypo- theses are accepted. For some costs, the hypotheses are rejected, although the accuracy of the estimate would improve with additional time and effort by the accountant. The hypotheses is rejected for other costs as the necessary information is not readily available to the accountant. As at least seventy-three percent of the initial and continuing compliance costs identified for a VAT computed by the in- voice method can be estimated accurately, Hypotheses 4 and 5 are accepted as generally true for each firm in this study and therefore in general. Some Implications of the Findings for Hypotheses 4 and 5 This section summarizes the estimated dollar amount of com- pliance costs by firm and examines the effect on compliance costs of changing certain VAT law provisions, the proportion of total compliance costs resulting from certain groups of difficult-to-estimate costs, and the cost of a particular VAT related operation. A substantial portion of each firm's total amount of estima- ted compliance costs results from individual compliance costs, each of which cannot be estimated accurately. Table 22 summarizes the estima- ted total dollar amount of initial and continuing compliance costs by 204 .cm assoo op Esss As mpooooo asp maNssoeoom sass; .m xpooaoo< ooss oasop aso mpmoo aooospoooo oosoospooo aso .op assop os Esss As mpooooo asp maNssoEE:m sass: .c xsooaoo< Eoss oasop aso mpmoo aooosooeoo pospsos asp "mausoom mo.moo.m oo.oop._ _m.mmc.o mo.mmo.m om.mom.m oc.omc._ o mo.mmo.m oc.omm.p mo.pcp.o mo.pco.m mm.com.o co.oom c om.cmo mo.ccm oo.cmm m_.com.m mm.mom.m om.moo c mo.o—m._ cm.mom mo.mmo oo.oom._ mo.mco mo.ooo c mo.mmm.o mo.mom mo.coo mo.ooo._ mo.mmm oo.mmm c op.mmm m mo.omo m mo.mmm m om.mmm.pm cm.omm c om.pmo m < oopop s .s .c .c c .c .c .< popoo s .s .c .c c .c .c .< Esss sappas aooc sappas aooc sappas aooc sappas aooc maposspmc mapoospmc mapoespmc mapoospmc so aosoom so aosoom so aosoom so aosoom mpmoc aooopooeoc oosoospooc mpmoc aooossoEoc pospsop s<> so aoAsuaoso>op oo sos mpmoc aooosooeoc aospmmoo so apoeppmm sosooc .mm aosoo 205 firm. Each total is subdivided into two parts. One is the summation of the individual, accurately estimated costs, coded A, B, C and J (see Table 21). The other is the summation of the individual costs, coded D, E, K and L, which could not be estimated accurately. For the three firms without a computer (firms A, B and C) the accurately estimated costs (coded A, B, C and J) constitute thirty-six to forty-six percent of their total amount of initial com- pliance costs. For the three firms with a computer (firms 0, E and F), the accurately estimated costs constitute fifteen to thirty-one percent of their total amount of initial compliance costs. For the six firms the accurately estimated portion of the total amount of continuing compliance costs ranges from thirty-six to sixty percent. Thus, for each firm the total estimated amount compliance costs consist of an accurate estimate plus an estimate subject to considerable variability. The accurate estimate constitutes the minimum possible compliance costs for that firm. There is little evidence to assist in estimating a maximum possible compliance cost for each firm. The researcher recognizes that the reader may disagree with time estimates made by the researcher in Tables 19 and 20. A revised cost estimate could be made by multiplying the compliance cost dollar amount determined by the researcher by the time estimate of the reader and dividing the result by the time estimate of the researcher. Some of the costs in Tables 19 and 20 could be estimated more accurately by the firm than by the researcher, since the firm's accountant has 206 access to confidential information not available to the researcher (exact wage rates, e.g., whereas the researcher used standard rates). Certain provisions of the hypothetical VAT law do not appear to result in substantial compliance costs. Five of these con- cern the listing of uncollectible accounts, inserting the VAT regis- tration number of the buyer on the sales invoice, having the VAT year end December 31 rather than coincide with the end of the firm's financial year, and requiring special annual listings of VAT billed by customer and suppliers (see chapter 3). Table 23, items 1-5, indicates these provisions and the compliance costs for each firm. The costs are a summation of the relevant portions of the individual costs shown in Tables 19 and 20. The impact of the five provisions on each firm is less than 1% of its total initial compliance costs (amounting to $11 to $59) and less than 7% of its total continuing compliance costs (amounting to $19 to $112). Thus while any or all of the five provisions would place an additional compliance burden on the firms, it does not appear that the burden would be substantial. Certain groups of compliance costs, some of which cannot be estimated accurately, constitute a significant portion of the total amount of initial and total continuing compliance costs for each firm. Costs relating to gaining familiarity with the VAT, reprogramming the computer, review of the firm's pricing decisions, and employee super- vision (Table 23, items 7-10) constitute 44% to 77% of each firm's total initial compliance costs. Reprogramming the computer is parti- cularly significant for those firms with a computer. Two groups of continuing compliance costs, employee supervision and error detection 207 mo mm oH om mm m c oaHHss o o o m o m H s<> so saspooom As osppaps Hoooo< posoaom o oosssooac .m c c m cm oH o c oaHHss mm mm m m m m H o<> so saeopmoc As oospmss ooooo< Hosoaom o oosssooac .o soaA posooooss m.ssps asp so o m o c c m c woa asp spsz aopoosoo oosp o o o c c o H saspos Hm sassaoac as soaA o<> asp so ooa asp oosAoI .m as pp a mo op N o .m .aopo>sH mp om o o s o H mapom so saAso so sasooz oospospmsoac p<> oospsamoH .m m m c c c c c mpooooo< _ p o p o o H apsppoappooss so osspass .H ozop o<> asp so moopms>oso opopsac moom mmom Hmo mHmH ommH mmm c mm aHsop Eoss u Esps sos pmoc aooosHoEoc oosoospooc Hopoo mmom mcom comm momH cmoH ocmH H mm aHsoo Eoss . Esss sos pmoc aooosHoooc HospsoH Hopoo s m c c c < c -oosoospooc H mpoooeo soHooc ooo Esss -HospHoH oospopsomac pmoc so avo maposspmc opopsac ooo sop s<> asp so moosmp>oso a>ss so mpmoc aoooHHosoc oopop oo pooosH .mm aHsoo 208 omm omm omms coo coo mmo mmo omm osmom cmm mmm mom omm ommo coo mm mom cmm omm mmo mmm cmm mms mm— mom cmm omm ms H c oaooo poo .mmm ooo .omm .mmms mpmoc .oososoas ooo .moospmaoc .oosms>sao=m aaAopoEc .cH H o oaooo .ooms paoo .asosmpoas osp -apos a_osps asp so zas>as .o H c oaooo .omm poaoxa c oaooo oHo .mmmuomms pmoc .sapoosoc asp oosssosoosoac .m H < oaooo spos .mop ooo mpHs pmoc .mpoaeassooac p<> spsz Appsospssos ossssoo .o aooz mapoespmc osopsac msaspo ooo Hmo ooo omos o so psoo oops moo ooo moms pmocuoooos asossc asp oos H -poassoc ooo mauso>oH maHom .msasHooom oo p<> oossoasc .m mpoooe< soHooc ooo Esss c loosoospooc -popwpoH oospossomac pmoc so aoAH ll .oacospooc .mm assos 209 .saEEosooso o AoHoEa poo maoo c Esss mo sasomoasp asp As aooo as opooz oosEEosooso aspo .oopsoaso mssp Esossao op saoso op msopoHoopoo ozp amososoo op oaas opooz s Esso s .m sapooso os oammoomso aso moosms>oso 3oH s<> asoo moo mmm mo Hop cmo mp c m oaooo spos .omo ooo poos mpmoc .oosp -oassoo ooo oospoapao sossc .m— mcm mom mmm Hop mcm omH c c oaooo spos .omo ooo mmos mpmoc .moospmaoc ooo .oosms>saocm aaAoooEm .HH s c c c c < c noosoospooc H mpsoooo soppos oso osps -Hosppsp soppossoaas pmoc so avo .oaosspsoo .mm apsop 210 and correction (Table 23, items 11 and 12), constitute 19% to 31% of each firm's total continuing compliance cost. The more assured an individual accountant was of the accuracy of his estimate of these groups of costs, the more assured he would be of the accuracy of his estimate of the total actual compliance costs. It is conceivable that the cost of checking the VAT cal- culation on the suppliers' sales invoices (compliance cost #643 and others) and correcting the errors found would exceed the costs of not performing this checking (see Table 23, item 6). The invoice would be checked to see that the amount of VAT shown has been properly added to the total before the VAT. If the supplier used the wrong percentage for the amount of VAT or for some other reason showed the incorrect amount, the firm would pay more or less than the proper amount to the supplier. Paying more than the proper amount would result in a cost due to the loss of the use of the cash. Paying less would result in a cost saving. In either case, when the firm filed its monthly VAT return, the return would reflect the amount actually invoiced. Thus, a firm might decide not to check the VAT calculation. 211 Hypotheses 6 and 7 6. The model TICC = a + gP can be used by a firm to estimate its total initial compliance costs for the stated VAT. Where P = the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices. a = a fixed amount in dollars (to be determined) 9 = a coefficient (to be determined) TICC = Total Initial Compliance Costs in dollars 7. The model TCCC = b + hN can be used by a firm to estimate its total continuing compliance costs for the stated VAT. Where N = the number of sales invoices plus the number of suppliers' invoices processed per year, but not by a computer. b = a fixed amount in dollars (to be determined) h = a coefficient (to be determined) TCCC = Total Continuing Compliance Costs per year in dollars The lists of possible compliance costs (Tables 19 and 20) and the methodology discussion (chapter 5) provide a framework the accountant could use to estimate the VAT compliance costs for his firm. However, preparing cost estimates in the manner used by this study is a time- consuming task. Certainly some accountants are interested in an esti- mate of their firm's VAT compliance costs without the effort of a de- tailed estimate. One approach is to make an educated guess such as Rudolph Niehus (a German CPA) who stated, referring to the German value- added tax law, "It may be said, therefore, that the new law will not place an undue burden on the accounting department."1 The inaccuracy of such guesses is evident in that two years later, referring to the same law, Niehus stated, "This disadvantage 1Rudolph” J. Niehus, "New German Added Value Tax Law,"'Taxes, 45 (November 1967); 746. 212 cannot be overlooked: an added value tax law greatly increases the administrative burden on the tax payer."2 To provide an estimate of greater accuracy than the accountant's guess and yet to be less time consuming to prepare than using the list of compliance costs, Hypotheses 6 and 7 were tested. Correlations were calculated which determined the a, g, b, and h values in the models. Using Pearson's r, the models were tested for signifi- cance at the alpha = .05 level and both hypotheses were accepted. The two models are more accurate than a guess by thelac- countant in that they are built upon the detailed estimates of the in— dividual possible compliance costs. The models do contain a source of inaccuracy in that they are calculated using the total compliance costs of each firm and that total includes costs coded D, E, K, and L which, as has been indicated in Hypotheses 4 and 5, are not accurately estima- ted. Table 24 summarizes the total number of sales invoices plus suppliers' invoices processed per year, but not by a computer, total number including those processed by a computer, and gross sales for each firm. Using the data shown in Table 24, Table 10 (Number of Persons in the Accounting Function Involved in the Processing of Sales and Suppliers' Invoices), and Table 22 (Dollar Estimates of Possible Com- pliance Costs for an Invoice-Type of VAT) correlations were calculated v, r 2Rudolf J. Niehus, "German Added Value Tax — Two Years After," Taxes, 47 (September 1969): 566. 213 Table 24. Number of Sales Invoices plus Suppliers' Invoices Processed Per Year and Gross Sales Number of sales plus Number of sales plus suppliers' invoices suppliers' invoices processed, not by a processed, including computer by a computer Gross Sales Firm (from Table 9) (from Table 9) (from Table 8) A 1.875 1.875 $4.5 mil. 8 19,505 19,505 3.8 mil. C 22,245 22,245 7.0 mil. 0 6,800 6,800 4.0 mil. E 36,000 189,000 6.25 mil. F 70.500 102.600 21.0 mil. ,— v—v—v— ov— fir which would determine the a, g, b and h values in the models. In addi- tion to calculating correlations for the two hypotheses, twelve additional correlations were calculated as follows. Gross sales, mean total number of employees, and number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices were each correlated with initial compliance costs from sources A, B, C and J. Gross sales, mean total number of employees, and total number of sales plus suppliers' invoices processed including those computer processed were each correlated with total continuing compliance costs. Gross sales, mean total number of employees, and total number of sales plus suppliers' invoices processed including those computer processed were each correlated with continuing compliance costs from sources A, B, C and J. 214 Total number of sales plus suppliers' invoices processed, but not by a computer, was correlated with continuing compliance costs from sources A, B, C and J. Pearson's coefficient of correlation r was determined and tested for significance at the alpha = .05 level for each of the correlations. The following results were obtained for the model TICC = a + gP where P = the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices a = 881.81 9 = 148.16 TICC = Total Initial Compliance Costs in Dollars Pearson's r = .95 which is significant at the .01 level for four degrees of freedom.3 The following results were obtained for the model TCCC = b + hN where N = the number of sales invoices plus the number of suppliers' invoices processed per year, but not by a computer. b = 873.83 h = .031 TCCC = Total Continuing Compliance Costs per year in Dollars Pearson's r .94 which is significant at the .01 level for four degrees of freedom. 3N. M. Downie and R. W. Heath, Basic Statistical Methods, 3rd ed. (New York: Harper & Row, 1970), p. 318. 4Downie and Heath, Basic Statistical Methods, p. 318. 215 The correlations of gross sales and mean total number of employees with total initial compliance costs were not significant. The correlations of gross sales and mean total number of employees with initial compliance costs from sources A, B, C and J were significant while that of the number of persons in the account- ing function involved in the processing of sales invoices and suppliers' invoices was not. The correlation of mean total number of employees with total continuing compliance costs was significant while the correlations of gross sales and total number of sales plus suppliers' invoices pro- cessed including those computer processed were not significant. The correlations of gross sales, mean total number of employees, and total number of sales plus suppliers' invoices pro- cessed, but not by a computer, with continuing compliance costs from sources A, B, C and J were significant while that of total number of sales plus suppliers' invoices processed including those computer pro- cessed was not. As three of the four correlations involving mean total number of employees tested significant, the compliance costs listed in Tables 19 and 20 were reviewed to see if any individual compliance costs were related to the mean total number of employees of the firm. None could be found. The fact that three of the correlations were significant moy have been chance, or the mean total number of employees and the compliance costs may be related to a third variable. 216 Conclusion for Hypothesis 6 Hypothesis 6 is therefore accepted using the values a = $881.81 and g = $148.16, as stated above. Thus a firm, to estimate its initial compliance costs under the invoice method of computing the VAT, could use the model TICC = $881.81 + ($148.16) (P) where P = the number of persons in the accounting function of the firm involved in the processing of sales invoices and suppliers' invoices. TICC = Total Initial Compliance Costs in Dollars Conclusion for Hypothesis 7 Hypothesis 7 is therefore accepted using the values b = $873.83 and h = $.031, as stated above. Thus a firm, to estimate its continuing compliance costs under the invoice method of com- puting the VAT, could use the model TCCC = $873.83 + ($.031) (N) where N = the number of sales invoices plus the number of suppliers' invoices processed per year by the firm, but not by a computer. TCCC = Total Continuing Compliance Costs per Year in Dollars. 217 Some Implications of the Findings for Hypotheses 6 and 7 As might be expected, the accuracy of the compliance cost estimates of the accountant is related to the amount of time spent preparing those estimates. If the accountant wishes to spend a mini- mal amount of time, then he can use the models of Hypotheses 6 and 7. If he wishes to spend more time and obtain greater accuracy, he can use the list of possible compliance costs as a basis for making de- tailed cost estimates. Of course, the most accurate amount of com- pliance cost could be determined by actually performing the changes necessitated by the VAT. Which method the accountant would use to prepare his estimate of his firm's compliance costs would depend on his evaluation of the costs to prepare and the benefits to be derived from each. The two models provide cost estimates more accurate than an accountant's guess, and they are less time-consuming to prepare than estimating each item in the list of possible compliance costs. In using the models accepted in Hypotheses 6 and 7, an accountant should recognize that were he to estimate his compliance costs item by item in Tables 19 and 20, his total estimated compliance costs might be greater than or less than that predicted by the models. When the initial and continuing compliance cost models for each of the six firms were used to predict the total costs estimated in this study (Table 22), the predicted costs were above the estimated costs for three firms and below for three firms for both models. The largest dollar amount difference among the initial compliance costs was the estimated cost exceeding the predicted cost by $771 for Firm 0 (29% 218 of D's estimated cost). For the continuing compliance costs the estimated cost exceeded the predicted cost by $433 for firm E (18% of E's estimated cost). The largest percentage difference among the initial compliance costs was the predicted cost exceeding the estimated cost by 43% for firm B ($617 difference). For the con- tinuing compliance costs the predicted cost exceeded the estimated cost by 36% for firm A ($249 difference). The model accepted in Hypothesis 7 indicates continuing compliance costs at least 3.6 times as much as those estimated in 5 Table 25 shows the Phyllis Barker's study published in 1972. estimated costs of the six firms in the Barker study compared with those estimated using the model accepted in Hypothesis 7. In answering Hypothesis 7 a correlation was determined which used only those costs whose source was A, B, C and J. Pearson's r for this model was significant at the .01 level. Applying this model, TCCC = $326.44 + $.0198 N, to the Barker firms would estimate continuing compliance costs at least 1.4 times those of the Barker article. The Barker article is sketchy as to what the VAT law is as- sumed to be as well as in identifying the individual compliance costs used, making it impossible to replicate the study. It seems evident, however, that the continuing compliance costs for each firm will be considerably higher than those suggested SPhyllis A. Barker, "The Value-Added Tax - The Cost to the Businessman," Journal of Accountancy, 134 (September 1972): 75-9; and Phyllis A. Barker,“Letters - Value-Added Tax," Journal of Accountancy, 135 (March 1973): 37. 219 Table 25. Hypothesis 7 Applied to the Barker Study Barker Studya This Study Estimated Estimated Con- Number Compliance tinuing Com- of Sales Costs in pliance Coats Firm and Type Invoices DollarsC in Dollars A - Manufacturere 400,000 $40,800 $ --- B - Manufacturer 1,700 56 927 C - Wholesaler 12,600 350 1,264 o - Retailerf 2.520 120 952 E - Trucking 400 100 886 F - Industrial Design 72 3 876 aPhyllis A. Barker, "The Value-Added Tax - The Cost to the Businessman," Journal of Accountancy, 134 (September 1972): 75-9; and Phyllis A. Barker, "Letters - Value-Added Tax," Journal of Accountancy, 135 (March 1973): 37. bThe articles do not state the number of suppliers' in- voices processed. When applying the model of Hypothesis 7, the number of suppliers' invoices was assumed to be zero. cThis was computed from the Barker articles, compliance costs per dollar of sales multiplied by dollars of sales. dThis was estimated using the model accepted in Hypothesis 7. Total Continuing Compliance Costs = $873.83 + $.03l N where N = the number of sales invoices plus the number of suppliers invoices processed per year, but not by a computer. The dollar amounts are all understated since the number of suppliers' invoices was assumed to be zero. eFirm A used electronic data processing so the model of Hypothesis 7 could not be applied as N is not known. fThe model of Hypothesis 7 in this study was developed from manufacturing firms and may not be applicable to Firm D, a retailer. 220 in the Barker article. The Cambridge Research Institute Study,6 concerning retailers and discussed in chapter 1, assumed a VAT rate of 2% and expected compliance costs of 2% to 4% of the VAT collected. Thus the compli- ance costs would be .0004 to .0008 of a retailer's sales dollar. Applying these percentages to the $600,000 in sales of the retailer in the Barker article, firm 0 yields expected compliance costs of $240 to $480. This is half or less than the amount predicted by Hypothesis 7 in Table 25. Note, however, that the model in Hypothesis 7 was developed from manufacturing firms and a service firm and may not be applicable to retail firms. Reducing expected compliance costs to a fixed percentage of sales, as the Cambridge Research Institute's study did, is not justified, since, as indicated in the discussion, the six firms in this study, the correlation between total continuing com- pliance costs and gross sales was not significant. An examination of the list of possible compliance costs, Tables 19 and 20, shows that only a portion of some relatively minor costs increases or decreases with a change in the dollar amount of sales. Additional dollar amounts of sales might mean for cost #483, for example, an additional digit in the VAT computation. 6Cambridge Research Institute, Prepared for American Retail Federation, The Value-Added Tax in the United States - Its Implications For Retailers (Cambridge, Mass.: Cambridge Research Institute, 1970), pp. 2, 137. CHAPTER VII CONCLUSIONS FOR THE ACCOUNTS METHOD OF COMPUTING THE VAT This chapter discusses and accepts, does not accept, or rejects each of the seven hypotheses for the accounts method of com- puting the VAT. Hypotheses 2 - 6 are accepted as generally true, Hypothesis 7 is not accepted, and Hypothesis 1 is rejected. Hypothesis 1 1. It is not possible to determine the changes that a VAT would require within the accounting function of each firm subject to the tax. An examination of the return (Figure 3) required by the accounts type of VAT shows that most firms would be maintaining the necessary ledger accounts already. However, there were two items the firms would have to report that might require changes in and addi- tional work by their accounting functions. Schedule A, item 1 of the return specified the deductions from gross receipts. Schedule A, item 3 of the return required the inventory value to exclude any payroll and overhead costs. Each of the six respondents was asked whether his firm would need to add any additional accounts to its ledger in order to accumulate the required information for the return. Attention was drawn to the two specific items indicated above. 221 problem” accounts accounts mulating would be find the 222 Firms 8, C and F responded that the two items would be "no and that the VAT would not require any additional ledger for their firm. Firm E responded that a few new ledger might be required, but that there would be no problem in accu- the information. Firm A indicated that no new ledger accounts required, but a small amount of work would be required to amount of deductions from gross receipts. Firm C replied that no new accounts would be required nor would it be any problem to comply with the reporting requirements. To remove the overhead and payroll from the inventory value would involve applying a per- centage to its value. Conclusion for Hypothesis 1 Each of the firms studied indicated few, if any, changes were needed for the firm to be able to accumulate the information necessary for it to complete its VAT return. The changes that would be required are minor procedural ones within the accounting function involving the individual posting the ledger. Firms without prior experience with the Michigan Business Activities Tax (BAT) may need to add additional accounts to their ledger as well as procedures for accumulating and posting the information to those accounts. The changes that a VAT would require are few, but they can be described. The hypothesis is therefore rejected in general for the accounts method of computing the VAT. 223 Hypotheses 2 and 3 2. The total initial compliance costs of a VAT can be broken into components that can be described in terms of in- formation readily available to a firm's accountant. 3. The total continuing compliance costs of a VAT can be broken into components that can be described in terms of information readily available to a firm's accountant. Hypotheses 2 and 3 are jointly discussed as they were in chapter 4. The listing of possible and initial continuing compliance costs follows (Tables 27 and 28). Based on the listing, Hypotheses 2 and 3 are accepted for most, but not all, of both types of costs. The list of compliance costs reflects the changes required in each firm, described in Hypothesis 1, as well as changes that other firms subject to the tax may be required to make. Each of the possible compliance costs has been identified with a three-digit number. If the description of the cost is identi- cal with that of a cost in the list for an invoice type of VAT (Tables 19 and 20),then the same three-digit number is used. Follow- ing the number is a code letter described in Table 16 as the source of the personnel (letters A-E) and non-personnel (letters J-L) dollar cost estimates. The possible compliance cost is described and under the description of those costs estimated by the researcher is the researcher's estimate (discussed in chapter 5) of the time or cost required. The dollar amounts of each individual compliance cost for each firm are separated and coded according to the category of indi- viduals (letters M-S, described in Table 17) to whom the cost estimate relates. 224 For the costs coded E or L, the information is not readily available to a firm's accountant for estimating that cost. For costs coded A-D, J and K the information is readily available and the accountant could estimate the costs based on a variety of sources of information, as discussed in chapter 6. Within the list, the indi- vidual compliance costs have been grouped by the sequence in which the costs would likely be incurred (summarized in Table 26). The total estimated dollar amounts of compliance costs for each firm, computed in detail in Tables 27 and 28 are summarized in Table 30. Conclusion for Hypothesis 2 Forty possible individual initial compliance costs for a VAT computed by the accounts method are identified in this study. As the information is readily available to a firm's accountant to esti- mate 40 of the 40 identified costs, Hypothesis 2 is accepted as generally true for each firm in this study and in general. Conclusion for Hypothesis 3 Thirty-four possible individual continuing compliance costs for a VAT computed by the accounts method are identified in this study. The information to estimate twenty-eight of the costs is readily avail- able and the information is not readily available for six costs (coded with letters E and L). Of these six costs, three (numbered 791, 801 and 811) concern reassessment of certain decisions within the firm, and three (numbered 972, 974 and 976) concern a government VAT 225 Table 26. Summary of Possible Compliance Costs for the Accounts Method of Computing the VAT Number of Individual Code Number and Description of Costs the Type of Cost Estimated fl 100 Initial Compliance Costs Total = 40 110 Prior to Start of VAT Year 111 Gaining Familiarity with VAT Requirements 121 Relating the VAT to the Firm 161 Designing the Necessary Accounting Procedures 201 Determining the Effect of VAT on Individuals in the Accounting Function 215 Reprogramming the Machines 216 For an Accounting Machine 236 For a Computer moo N03 285 Training of Employees Concerning the VAT 331 Purchasing Additional Office Equipment 351 Miscellaneous 371 Registering for VAT 380 During First Year 381 Miscellaneous 4 400 Continuing Compliance Costs Total = 34 410 Annually at Start of the VAT Year 1 420 Related to Sales 425 Related to Each Sale (Non-Computer Processed) 565 Related to Each Sale (Computer Processed) 620 Related to Purchases 720 At Various Times Through the Year 731 Related to New Employees 751 Related to All Employees 791 Executive Attendance at Meetings Concerning VAT 801 Planning to Reduce Tax Impact 811 Reassessment of Decisions 820 Periodically - Monthly 850 Periodically - Quarterly 880 Annually - At End of Financial and VAT Year 890 Annually - After End of VAT Year 930 Miscellaneous 980 Compliance Cost Savings NN-‘w kD—J 0000 NW 226 .mosss amasp sos Asommaoao s so apoespma oz c c c c c c c osopas asp oo oospsooas sos mpoooooo saooaH Asommauao asp opos mpopaoas mmoso aposooam ops: sass: masooaooso oospoooooo asp oosoosmac cmmp masooaooso ooppoooooo Asommaoao asp oosoosmac omo .poooooo sao .ose mus om. mm.H om. om. om. om. c mpoooooo saooap 3a: asp op msasooo poooooo oosoosmm< cmmp .ssss sooa sos poooooo aosvoo o<> o maooooop pmoc .poooooo sao .oss muouaeso om. as.p as. am. as. oo. o saooap asp op oassooas mpoooooo zao asp ooposesapac comp osss asp op pos asp osspopas pmp oo.mo oo.omp oo.sm oo.oom oo.so oo.oo s soppopapoap asp so sospopasosapss m.osss asp mm.om mm.om 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As the information is readily available to a firm's accountant to estimate 28 of the 34 identified costs, Hypothe- sis 3 is accepted as generally true for each firm in this study and in general. Hypotheses 4 and 5 4. A dollar amount can be estimated accurately for the VAT initial compliance costs identified in Hypothesis 2. 5. A dollar amount can be estimated accurately for the VAT continuing compliance costs identified in Hypothesis 3. The accuracy of a compliance cost estimate depends on the availability of the data to make the estimate and the amount of time to make the estimate. For the costs in Tables 27 and 28, coded A, B, C and J (See Table l6) the information is readily available to a firm's accountant. Using the same cost estimation process as this study (see chapter 5), the accountant could make his estimates. As the estimate would fall within narrow bounds on either side of the expected true value, the cost can be estimated accurately. Half of the initial and continuing compliance costs identified can be estimated accurately (see Table 29). For the costs coded D and K, the information is available to the firm's accountant, but his estimate is not expected to be accurate because it would be subject to wide variability. Increased Taccuracy can be achieved with increased costs in the form of increased time and effort by the accountant and his staff. Seventeen of the initial compliance costs identified and seven of the continuing 242 Table 29. Number of Compliance Costs for an Accounts-Type of VAT by Source of Estimates Number of Number of Code Initial Continuing Letter- Source of Estimate in This Compliance Compliance Per Study and Its Anticipated Costs-per Costs-per Table 16 Accuracy-per Table 16 Table 27 Table 28 Personnel Dollar Cost Estimates A Firm interviewed, accurate 4 l B Standard Time Data, reasonably accurate O 10 C Researcher, accurate within narrow bounds l7 6 D Researcher, inaccurate because subject to wide variability 16 3 E Researcher, inaccurate because information is not readily available to a firm's accountant 2 9 Non-Personnel Dollar Cost Estimate J Firm interviewed, accurate 0 0 K Researcher, inaccurate because subject to wide variability l 4 L Researcher, inaccurate because information is not readily available to a firm's accountant .b olo OJ .5 TOTAL 243 compliance costs identified are estimates subject to wide variability and thus not expected to be accurate. For the costs coded E and L, the information is not read- ily available on which the accountant could base his estimate, and therefore the estimates would be accurate by chance only. Two of the initial compliance costs were coded E and L, as were ten of the con- tinuing compliance costs. Conclusions for Hypotheses 4 and 5 Individual compliance costs can be estimated with varying degrees of accuracy. For just over half of the individual costs the hypotheses are accepted. For some individual costs, the hypotheses are rejected, although the accuracy of the estimate would improve with additional time and effort by the accountant. The hypothesis is re- jected for other costs as the necessary information is not readily available to the accountant. As at least fifty percent of the initial and continuing compliance costs identified for a VAT computed by the accounts method can be estimated accurately, Hypotheses 4 and 5 are accepted as generally true for each firm in this study and therefore in general. Some Implications of the Findings for Hypotheses 4 and 5 A substantial portion of each firm's total amount of estima- ted compliance costs results from individual compliance costs, each of ‘which cannot be estimated accurately. Table 30 summarizes the .mm assap op Esss As mpooosa asp maNssosEom sass: .m xsooacc< Eoss oasop aso mpmoo auoaspcsoo cosoospooo ass .AN assas os Esss As mpooosa asp maNssmEEom sass: .s xsooacc< soss oasap aso mpmoo aoooschoo saspsos ass "mausoom 244 mm.oes mm.om» oc.omp em.mv mm.mmn mm.mmm s mo.m“? Fo.¢ms mo.mm vm.m¢m o~.FNA mp.smm m mm.mms so.¢ms mm.mm mm.msm Fs.—mm mo.mm c mo.mmm so.¢ms cc.cm mm.mpn Fm.mmm co.mem o mm.mns oo.omp ms.vo mm.svm mm.mmm vs.mm_ m ms.momw mo.mmpm mm.mmw mm.msmw em.m¢¢m oo.vo_m < Papos s .x .u .c a .u .m .< sopoh s .x .m .c a so .m .< Esss sappap aooo sappap aaoo sappap aooo sappap aooo mapoospmm maposspmm maposspmm mapaespmm so aosoom so aosoom so aosoom so aosoom mpmou aooospcoom cosoospooc mpmom auoasposoc popppop .s<> so acAs-mpo:ooo< oa sos mpmou aooassosoc apssmmoc so aposspmm sapsoc .cm assas 245 estimated total dollar amount of initial and continuing compliance costs by firm. Each total is subdivided into two parts. One is the summation of the individual, accurately estimated costs, coded A, B, C and J (see Table 29). The other is the summation of the individual costs, coded D, E, K and L, which could not be estimated accurately. The accurately estimated portion of each firm's total amount of initial compliance costs ranges from thirteen to forty-eight percent. The accurately estimated portion of the total amount of con- tinuing compliance costs ranges from twenty-two to forty-one percent. These accurate estimates provide the minimum possible compliance costs for each firm. The implementation date of the tax is the only pro- vision of the tax law developed in chapter 4 which, if changed, would result in substantially changed compliance costs for any firm. With an implementation date of January l, four firms must do additional accounting work to determine their receipts and expenditures prior to that date, which is not their year end. The four firms' additional initial compliance costs would be from $82 to $135 (see Table 3l, Item l). Selecting some other implementation date would reduce the initial compliance cost of one of the firms (A, D, E or F) while increasing it for B and C. Certain groups of compliance costs, some of which cannot be estimated accurately, constitute a significant portion of the total amount of initial and continuing compliance costs for each firm. Costs relating to gaining familiarity with the VAT, reprograming the computer, and review of the firm's pricing decisions (Table 31, items 2, 3 and 246 sop mss mms omH mmm Amp mom mms NA— mom ooH mm mos NAH mmm mmm mmm msm mm— ass mom Nos mm mom ops H o oaooo .Amms poaoxa c oaooo HHo .mmmnsmms pmom .sap nocsou asp cossascosoam .m H < oaoou spos .mHH soo me s pmou .mpoasasscoas s<> spsz ApssosHsEas oososom .N H oAm soo NcHs pmoo so mpsos . asaaA Hasooaoss m.esss asp so ooa asp pa oosp saspas H Asaoooo s<> asp cospoasascEH .H m cm asses soss . Esss sos pmoc aooasHoeoo cosoospooc Hapos H om assap ooss - osss sos poop aasaspoooa saspssp papop mpooos< saHHoc soo Esss m -mosoospooc H -HospsoH oospcssomac pmou so aoAs mapasspmm osapsau soo zap s<> asp so apac oospapanaHoEH asp so mpmoo aooachEoc sapos oo poocsH .Hm aHsas .saEEosc -osc a AoHoEa poo maoo m osss ma sasomoasp asp As aooo as opaos mosssoscoscas asks .o sapoasu os oammoomso ms oosms>osc zap p<> msssa 247 mm NH mp mm mH Ho 0 < oaooo .ocms pmoc .osopam s<> Haooo< asp cossaoaso .A NH mm mm mm mm mm c u oaooo .omms pmou .mosopam s<> AHsapsaoc asp cossacasc .o so so so so so so u m oaooo .Hcss pmom .s<> cososaoooo mmospaaz Hm muzwvcmuum w>wuzumxm .m so so so so so so u m oaooo .Hpm ooa c oaooo .ocms pmoc .moosmsoac cos Hmm Hmm Hmm Hmm Hmm Hmm H -osso m.Esss asp so zas>am .o s a o a m s o icosoospooo H mpoooe< soHHoc soo Esss -HospsoH oospcssomac pmou so aoAs .oaoospoou .pm assoh 248 4 I) constitute 65% to 84% of each firm's total initial compliance costs. Continuing costs concerning review of the firm's pricing decisions, executive attendance at meetings concerning VAT, and com- pleting the returns (Table 3l, items 4C, 5, 6 and 7) constitute 77% to 82% of each firm's total continuing compliance costs. The more assured an individual accountant was of the accuracy of his estimate of these costs, the more assured he would be of the accuracy of his estimate of the total actual compliance costs. 6. The model its total Where P = a 9 TICC 7. The model its total Nhere N = b h TCCC Hypotheses 6 and 7 TICC = a + gP can be used by a firm to estimate initial compliance costs for the stated VAT. the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices. a fixed amount in dollars (to be determined) a coefficient (to be determined) Total Initial Compliance Costs in dollars TCCC = b + hN can be used by a firm to estimate continuing compliance costs for the stated VAT. the number of sales invoices plus the number of suppliers' invoices processed per year, but not by a computer. a fixed amount in dollars (to be determined) a coefficient (to be determined) Total Continuing Compliance Costs per year in dollars As was discussed for the invoice type of VAT, it would be a time consuming task for the accountant to estimate the compliance costs of an accounts type of VAT for his firm using a list of possible compliance costs . Some accountants certainly would like an estimate for their firm without the effort of making one. To provide an esti- mate less time-consuming to prepare than using the list of compliance 249 costs, Hypotheses 6 and 7 were tested. Using the data shown in Table 30 (Dollar Estimate of Possible Compliance Costs for an Accounts Type of VAT), Table 10 (Number of Per- sons in the Accounting Function Involved in the Processing of Sales and Suppliers' Invoices), Table 9 (Number of Sales Invoices plus Suppliers' Invoices Processed Per Year and Gross Sales), and Table 8 (Description of Firms Studied),correlations were calculated which would determine the a, g, b and h values in the models. In addition to calculating correlations for the two hypotheses, twelve additional correlations were calculated as follows: Gross sales, and mean total number of employees were each correlated with total initial compliance costs. Gross Sales, mean total number of employees, and number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices were each correlated with initial compliance costs from sources A, B, C and J. Gross sales, mean total number of employees, and total number of sales plus suppliers' invoices processed including those computer processed were each correlated with total continuing com- pliance costs. Gross sales, mean total number of employees, and total number of sales plus suppliers' invoices processed including those computer processed were each correlated with continuing compliance costs from sources A, B, C and J. Total number of sales plus suppliers' invoices processed, but not by a computer, was correlated with continuing compliance costs 250 from sources A, B, C and J. Pearson's coefficient of correlation r was determined and tested for significance at the alpha = .05 level for each of the correlations. The following results were obtained for the model TICC= a + gP where P = the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices a = 567.55 9 = l2.ll TICC = Total Initial Compliance Costs in dollars Pearson's r .87 which is significant at the .05 level for four degrees of freedom. Pearson's r at the .05 level was not significant for any of the five other correlations concerning initial compliance costs. In none of the eight correlations calculated, including Hypothesis 7, concerning continuing compliance costs did Pearson's r have a value exceeding .43. Thus these correlations are not signi- ficant at the .05 level for four degrees of freedom.2 Conclusion for Hypothesis 6 Hypothesis 6 is therefore accepted using the values a = $567.55 and g = $l2.ll, as stated above. Thus to estimate its initial 1N. M. Downie and R. N. Heath, Basic Statistical Methods, 3rd ed. (New York: Harper & Row, l970), p. 318. 2Downie and Heath, Basic Statistical Methods, p. 318. 251 compliance costs under the accounts method of computing the VAT, a firm could use the model TICC = $567.55 + ($l2.ll) (P) where P = the number of persons in the accounting function involved in the processing of sales invoices and suppliers' invoices. TICC = Total Initial Compliance Costs in Dollars Conclusion for Hypothesis 7 Hypothesis 7 is not accepted and a firm could not use the model to estimate its total continuing compliance costs under the accounts method of computing the VAT, as neither Hypothesis 7 nor seven alternative correlations concerning continuing compliance costs had a Pearson's r value which tested significant. Some Implications of the Findings for Hypotheses 6 and 7 While Hypothesis 7 was not accepted, a firm would still be interested in estimating its total continuing compliance costs. The three correlations of TCCC and total number of invoices processed by hand, total number of invoices processed, and gross sales had b values in the $l905 and h values of O to -.3. An examination of the indivi- dual compliance costs (Tables 27 and 28) did not reveal any other factor that might correlate with TCCC. Therefore it is possible that total continuing compliance costs are a fixed cost. The average cost for the six firms in this study would be $190, while the costs range is from $172 to $228. Using $l90 as the predicted total continuing lcompliance cost for each firm, the predicted exceeded the total 252 estimated cost from the detailed listings (Table 30), by no more than 17% of the estimated cost. The predicted total exceeded the lowest estimated cost (for firm D) by $18 (10% of D's estimated cost) and was less than the highest estimated cost (for firm C) by $38 (17% of C's estimated cost). Given this small range of difference between the predicted and the estimated cost for each firm, it appears that continuing compliance costs of $190 per firm is a reasonable estimate for these firms and perhaps for all such firms. CHAPTER VIII SUMMARY AND IMPLICATIONS Summary and Implications of this Study The study shows that neither an invoice nor an accounts-type of VAT would require major changes in the firms subject to the tax. The study identifies numerous possible compliance costs for both types of VAT and shows that dollar amounts can be accurately estimated for many of the individual costs. The study also shows that the estimation of a number of compliance costs, particularly computer-related costs, either cannot be done with accuracy or require a considerable amount of an accountant's time. These hard-to-estimate costs in some in— stances constitute a significant portion of the firm's anticipated to- tal compliance costs. Models are determined that would assist an ac- countant in estimating his firm's VAT compliance costs. These models are the only ones currently available for estimating VAT compliance costs. Businessmen and accountants can use the study, and in partic- ular the lists of compliance costs, as a planning guide to indicate the actions they would need to consider and possibly take to comply with a VAT, should one be adopted. The study can assist them in estimating their firm's compliance costs and determining the additional accounting staff needed. 253 254 The study reveals some of the problems that economists will have in attempting to estimate the macro-economic effects of a VAT. The macro estimates are contingent on reliable estimates at the level of the firm and these are difficult for the firm's accountant to make. The tentative models for estimating a firm's compliance cost indicate that the costs are related to the number of persons in the accounting function who process sales and suppliers' invoices and that the costs are related to the number of these invoices processed by hand. Con- tinuing compliance costs for an accounts-type of VAT may be approxi- mately the same dollar amount for each firm. Census data show the size and number of firms in the country, but the researcher is not aware of nationwide data concerning either the number of persons pro- cessing sales and suppliers' invoices or the number of these invoices processed by hand. The economist thus lacks bases for estimating the total compliance costs of business. Based on Tables 8, 22, and 30, the costs of complying with the VATs assumed in this study would amount to less than 1 percent of firms' sales, and thus they may not have much impact on the prices charged by firms. Assuming the VAT law provisions developed in chapter 2, this study indicates that certain possible provisions of the VAT law, such as listing VAT billed by customer and supplier, do not result in sig- nificant compliance costs (see Tables 23 and 31). Most of the compli- ance costs can be attributed to the VAT law as a whole rather than to any particular provision. Thus legislators should note that criticism by business concerning compliance costs cannot be mitigated by changing a few provisions of the law. 255 The study discloses the regressive impact of compliance costs for an accounts-type of VAT. The continuing compliance cost is about the same for each of the six firms, although their sizes vary considerably. A provision might be included in the legislation which would allow each firm a deduction against its tax to compensate it for completing a return. If under the invoice type of VAT, the government desires information concerning VAT invoiced by customer or supplier for statistical or enforcement purposes, the government could pay for this by allowing the firm a tax credit on the VAT return. The credit under either type of VAT could be based on some measure of the amount of cost the firm is required to incur. An invoice-type of VAT would affect firms which print busi- ness forms and reprogram accounting machines and computers while an ac- counts-type of VAT would have little impact on these firms. Those who supply these services to business would have a spurt in activity prior to the implementation date of the tax. An invoice or accounts-type of VAT would have an impact on the practice of certified public accountants (CPA's) and other public accountants. For both the CPA and the public accountant, this spurt of activity might be added to their already busy period of January to April. A VAT would generate an additional ongoing need for their ser- vices, and, depending on the due date of the year-end VAT return, might provide additional work in what is already a busy time of the year. 256 Implications for Further Research This study could be replicated using a different set of firms. In this study, there were five manufacturing firms and a ser- vice firm. Their sales ranged from $3.8 million to $22 million and under the hypothetical invoice-type of VAT developed in this study the sales would be taxed at only one VAT rate. The total number of em- ployees ranged from 80 to 700. All were audited by CPA's. There are a number of characteristics that could be used for selecting different sets of firms that could be studied. These characteristics include size, measured either in terms of dollars of sales or number of employ- ees; the number of products sold, since firms selling a variety of products would be likely, under an invoice-type of VAT, to have value- added taxed at various rates; and the firm's place in the channels of distribution, since the number of sales, the dollar amount of each sale, and whether the buyer is another firm or a consumer, could all affect compliance costs. Another characteristic is the degree of mech- anization of the entity's accounting system. For an invoice—type of VAT, it appears that the firm with a computer will have larger initial compliance costs and lower continuing ones than a similar firm which uses accounting machines. Manual accounting systems and those that do not prepare sales invoices undoubtedly have different patterns of pos- sible compliance costs. A retail firm with numerous sales of inter- mixed food and merchandise may have peculiar compliance costs under an invoice-type of VAT. Were the adoption of a particular VAT imminent, a firm's ac- countant might be willing to spend more time familiarizing himself with 257 the VAT law provisions and in making estimates of the additional time involved than were the personnel interviewed for this study. The qual- ity of the estimates, particularly of the computer-related costs could be raised if the accountant and computer programmer were willing to spend additional time preparing their estimates. A lack of data con- cerning wage rates, particularly of the comptroller, could perhaps be overcome in another study. Possible extensions of the research includes calculation of each firm's possible VAT liability, calculation of the effects of a VAT on each firm's cash flow, the imputation of interest on any posi- tive or negative effects, and the determination of the effect of a VAT on a firm's managerial decisions (such as those concerning marketing, production, finance, and purchasing). The research could identify the particular decisions affected and also the direction and magnitude of any changes. Additional research could possibly identify improvements in the accounting system which would result because a VAT provides the incentive to review and change the accounting system. These improve- ments could lead to increased efficiency or an overall cost reduction. Another topic for investigation would be the comparison of an accountant's overall estimate of the compliance costs of a tax with the total of an item-by-item estimate of the cause of the compliance costs. The questionnaire approach of asking an accountant for a single ("lump sum") estimate of his compliance costs for a certain type of tax may be highly inaccurate. The Yocum study of Ohio sales tax compliance costs took the detailed approach while the Wicks and Killworth study of 258 compliance costs took the single estimate approach.1 It is possible that the differences between the estimates of the Barker study and those in this study (see Table 25) are related to use of the single estimate approach by Barker.2 1James C. Yocum, Retailers' Costs of Sales Tax Collection in Ohio (Columbus: Bureau of Business Research, Ohio State University, |96l) and John H. Wicks and Michael N. Killworth, "Administrative and Compliance Costs of State and Local Taxes," National Tax Journal, 20 (September 1967):309-15. 2Phyllis A. Barker, "The Value-Added Tax - The Cost to the Businessman," Journal of Accountancy, 134 (September 1972): 75- 9; and Phyllis A. Barker, "Letters - Value-Added Tax," Journal of Accountancy, 135 (March 1973): 37. SELECTED BIBLIOGRAPHY SELECTED BIBLIOGRAPHY Barker, Phyllis A. "The Value-Added Tax - The Cost to the Businessman." Journal of Accountancy, 134 (September 1972), 75-9. . "Letters - Value-Added Tax.‘I Journal of Accountancy, 135 (March 1973), 37. Cambridge Research Institute. Prepared for the American Retail Federa- tion. The Value-Added Tax in the United States - Its Impli- cations for Retailers. Cambridge, Mass.: Cambridge Research Institute, 1970. Shoup, Carl S. Public Finance. Chicago: Aldine Publishing Co., 1969. Sullivan, Clara K. The Tax on Value Added. New York: Columbia Uni- versity Press, 1965. Tait, Alan A. Value Added Tax. London: McGraw-Hill, 1972. NOTE: The first three works were the only works in the value-added taxation literature which were directly related to the topic of this study. The last three works were particularly useful general descriptions of value-added taxation. For general bibliographies of value-added taxation, see chapter 1, footnote 28. 259 APPENDICES APPENDIX A CONSTRUCTION OF COMPONENTS OF FORMULA USED TO INCREASE REPORTED HOURLY WAGE RATES OF EMPLOYEES WITHIN THE FIRM APPENDIX A CONSTRUCTION OF COMPONENTS OF FORMULA USED TO INCREASE REPORTED HOURLY WAGE RATES OF EMPLOYEES WITHIN THE FIRM Wage rate per hour was taken from the Michigan, Salary Survey Report- I 1971. Total annual hours for which the employee is paid = 2088 hours = work days per year (261) x hours per day paid (8). Week days per year (261) = days per year (365) - weekends (2 x 52); Hours per day paid (8) = hours paid per week (40)2 a days per week (5). Total annual hours of effective production time for the employee = 1749.6 hours = days at work per year (243) x effective production hours per day (7.2). 1Michigan, Civil Service Commission, Salary Survey Re ort 7 1971 (Lansing: Michigan Civil Service Commission, September 19 1). 2Michigan, Civil Service Commission, Salary Survey Report - 1971, p. l. 260 261 Appendix A. Continued. Days at work per year (243) = week days per year (261) - paid holidays (8)3 - paid vacation days (10)4 - paid sick days (0)5; Effective production hours per day (7.2) = hours per day (8) - coffee break time (2 x 15 min.)6 - delay in starting work and early stopping (4 x 4-1/2 min.)7. Employer annual contribution for Social Security and Medicare: Employer contribution for Social Security in 1973 = 4.85% of the employees wage or salary, for Medicare in 1973 = 1.0%, and the base to which the taxes apply in 1973 = first $10,800 per year.8 For employees whose wage rate is less than or equal to $5.172 per hour the contribution = Social Security plus Medicare rates (5.85%) x annual hours for which the employee is paid (2088) x wage rate per hour. For employees whose wage rate is greater than $5.172 per hour the contribution = $631.80. 7'7 r— 3This was estimated based on the information provided by the firms interviewed. 41bid. 5Ibid. 6This was estimated based on the information provided by the firms interviewed and the researcher's experience in organizations. 71bid. 8Commerce Clearing House, Inc., Standard Federal Tax Reporter - 1973, (Chicago: Commerce Clearing House, 1973), para. 113. 262 Appendix A. Continued. $5.172 per hour = wage base ($10,¢OO) a annual hours for which the employee is paid (2088). Employer annual contributions for unemployment insurance = $54.18 per year = unemployment tax rate (1.29%) x wage base to which the tax applies ($4,200). Unemployment tax rate of 1.29% = average employer unemployment insurance tax rate as a percent of taxable wages in Michigan in 1968;9 $4,200 = wage base to which the unemployment insurance tax applied in Michigan in 1972.10 Employer annual contribution for workmen's compensation insurance = workmen's compensation rate (.0017) x annual hours for which the employee is paid (2088) x wage rate per hour. Workmen's compensation rate for clerical office employees is 17¢ per $100 payron.n Employer annual contribution for other fringe benefits of $252 = months (12) x total monthly contribution ($21). 9U.S., Department of Labor, Manpower Administration, Unemployment Insurance Tax Rates by Industry - 1968 (Washington, D.C.: Government Printing Office, 1970), p. 237. 10Commerce Clearing House, Inc. , State Tax Guide-All States, (Chicago: Commerce Clearing House), para. 535. 11This was stated by W. 0. Morgan, Michigan Workmen's Compensation Rating Bureau, in a letter to the author dated February 15, 1973. 263 Appendix A. Continued Total monthly contribution ($21) = contribution for employee health insurance per month ($21).12 The formula used to adjust the wage rates of employees was [(wage rate per hour x total annual hours for which the employee is paid) + employer's annual contribution for Social Security and Medi- care + employer's annual contribution for unemployment insurance + employer's annual contribution for workmen's compensation insurance + employer's annual contribution for other fringe benefits] a total annual hours of effective production time for the employee. The formula for employees earning less than or equal to $5.172 per hour was [(wage rate per hour x 2088 hours) + (5.85% x wage rate per hour x 2088 hours) + $54.18 + (.0017 x wage rate per hour X 2088 hours) + $252] a 1749.6 hours. This equals [(wage rate per hour x 2088) x (l + .0585 + .0017)] % 1749.6 + ($54.18 + $252) a 1749.6. This equals [(wage rate per hour) x (2088) x (1.0602)] s 1749.6 + $306.18 + 1749.6. This equals [(wage rate per hour) x (2213.6976 % 1749.6)] + $306.18 + 1749.6. Thus, the formula was wage rate per hour x 1.2653 + $.l75 for employees earning less than or equal to $5.172 per hour. 12This was estimated based on the information provided by the firms interviewed and telephone interviews May 23, 1972 with James Griffin, Manager, Management Recruiters, Lansing, Michigan; Gordon Lowell, Gordon Lowell Associates, Lansing, Michigan: and James Steel, Snelling & Snelling, East Lansing, Michigan. 264 Appendix A. Continued. The formula for employees earning more than $5.172 per hour was [(wage rate per hour x 2088 hours) + $631.80 + $54.18 + (.0017 x wage rate per hour x 2088 hours) + $252] a 1749.6 hours. This equals [(wage rate per hour x 2088) x (l + .0017)] % 1749.6 + ($631.80 + $54.18 + $252) + 1749.6. This equals [(wage rate per hour) x (2088) x (1.0017)] + 1749.6 + $937.98 + 1749.6. This equals [(wage rate per hour) x (2091.5496 + 1749.6)] + $937.98 % 1749.6. Thus, the formula was wage rate per hour x 1.1954 + $.536 for employees earning more than $5.172 per hour. APPENDIX B STANDARDS FOR COMMON OFFICE OPERATIONS USED IN THE DEVELOPMENT OF TIME ESTIMATES FOR THE PERFORMANCE OF CERTAIN ACCOUNTING OPERATIONS RELATED TO A VAT APPENDIX B STANDARDS FOR COMMON OFFICE OPERATIONS USED IN THE DEVELOPMENT OF TIME ESTIMATES FOR THE PERFORMANCE OF CERTAIN ACCOUNTING OPERATIONS RELATED TO A VAT _a Minutes For Description of Operation Each Operationa Adding machine, 10 key electric Enter digit-per stroke .0033 Depress add bar .0090 Print total .0240 Adding machine, full keyboard Enter digit-per stroke .0043 Typing Position roller by hand and return to key board .0295 Handle material before typing-single sheet .1300 Key strokes and spaces - filling in printed forms .0032 Rotary Calculator Clear machine .0400 Read factors .0160 Key strokes, multiplicand-per digit .0050 Key strokes, multiplier-per digit .0033 Operate multiply key ‘ .0070 Machine operating time per digit .0108 Handwriting Manual printing-per character .0114 Read and write, no column alignment- per digit .0088 Read and write, column posting—per digit .0115 aNotice that the minutes to perform each operation includes no rest time. 265 266 Appendix B. Continued. Description of Operation w Minutes For Each Operationa Paper Handling Pick up first sheet from top of pile Pick up, jog, and cross stack over 20 papers per group, from flat surface Sort 8-1/2 x 11 card or sheet Table top sort-for lst category Table top sort-for 2nd - 15th categories, per category Reading Numbers up to 3 digits-per digit Add for each additional digit Comparing or proofreading Numbers, each lst digit Each additional digit .0245 .1120 .0161 .0006 .0033 .0027 .0090 .0027 Source: The estimates used in this appendix are reprinted with per- mission from the April 1968 issue of Modern Office Procedures and copyrighted 1968 by Industrial Publishing Company, Divi- sion Pittway Corporation. The article was titled, "How Much Work Can You Expect?", Modern Office Procedures, 13 (April 1968): 51-2. aNotice that.the minutes to perform each operation includes no rest time. APPENDIX C DETAILS OF TIME ESTIMATES FOR THE PERFORMANCE OF CERTAIN ACCOUNTING OPERATIONS RELATED TO A VAT APPENDIX C DETAILS OF THE ESTIMATES FOR THE PERFORMANCE OF CERTAIN ACCOUNTING OPERATIONS RELATED TO A VAT In this appendix the time estimates not otherwise labeled were taken from Standards for Common Office Operations1 (see Appendix 8). Certain assumptions were made by the researcher and used throughout this appendix. These assumptions are as follows: 1. Firm names = 20 letters and spaces; 2. VAT registration numbers = 10 digits (9 digits + 1 space);2 3. On a sales invoice, the total sales of any VAT rate column, the total of any exempt column used, and the total before VAT is added = 6 digits (XXXX.XX); 1"How Much Work Can You Expect?" Modern Office Procedures, 13 (April 1968): 51-2. Note that the minutes to perform that operation includes no rest time. . 2Commerce Clearing House, Inc., Corporation-Partnership-Fiduciary Filled-In Tax Return Forms - 1972 Edition (Chicago: Commerce Clearing House, 1972), p. 6. 267 268 Appendix C. Continued. 4. On sales invoices a firm prepares, the amount of VAT calculated under any one VAT rate and the total VAT = 4 digits (XX.XX); 5. On invoices a firm receives, the amount of VAT = 4 digits (XX.XX); Note that assumptions 3, 4, and 5 mean that for invoices representing goods taxable at 2%, sales could range between $500.00 and $4,999.50; for goods taxable at 4%, sales could range between $250.00 and $2,499.75. 6. On sales invoices a firm prepares, individual item amounts = 5 digits (XXX.XX). 7. Titles of accounts relating to VAT = 46 letters and spaces. 8. Account numbers = 4 digits. Any other assumptions made by the researcher are so labeled. 269 Appendix C. Continued. Time to Perform Certain Accounting Operations Related to a VAT Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation Typing ledger account titles Handle material (insert) .1300 Position roller .0295 Type letters and digits [.0032 x (46 +4)] .1600 Handle material (remove) .1300 Pick up paper (turn over old account) .0245 Total .4740 Hand write VAT registration number of the buying firm Manual printing (.0114 x 10 digits) .1140 Total .1140 On a sales invoice: (The number in parenthesis refers to the index number on the specimen sales invoice. Figure 2). Typing VAT registration number of the buying firm (_6_) Position roller Type number (.0032 x 10 digits) Total Entering the net amount of an item in.the proper VAT rate column (1§)-(1g) Position roller Type amount [.0032 x (5 digits + 1 point)] Total Additional typing of "sub" (20) Type (.0032 x 3 letters) Total .0295 saw .0615 .0295 .4022. .0487 .0096 .0096 *o—— .v— v 270 Appendix C. Continued. Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation Adding amounts in a VAT rate column (2.2) - (2.5) Enter digit in adding machine and depress add bar (.0033 x 5 digits + .0090) = .0255 per number of amounts added Print total = .0240 Entering the total sales for each VAT rate column or exempt column used (22) ~ (25) Read factors .0160 Position roller .0295 Type [.0032 x (6 digits + 1 point)] .0224 Total .0679 Crossfooting of the VAT sales by rate and of the exemption (gg) Enter digit in adding machine and depress add bar (.0033 x 7 digits + .0090) = .0321 per number of column totals used Print total = .0240 Comparing crossfooting of VAT sales by rate E26) with vertical addition of net amount 21 Read total from tape (.0033 x 3 + .0027 x 3) .0180 Comparing (.0090 x l + .0027 x 5) .0225 Total .0405 Calculating the amount of VAT for one VAT rate (:0. (2.8) Clear machine .0400 Read factor .0160 Multiplicand per digit (.0050 x 6 digits) .0300 Multiplier per digit (.0033 x l) .0033 Operate multiply key .0070 Machine Operating time .0108 Total .1071 271 Appendix C. Continued. Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation Entering the amount of VAT due (21), (29). (19) Read factors .0160 Position roller .0295 Type [.0032 x (4 digits + 1 point)] .0160 Total .0615 Additional typing of I'VAT" (22) Position roller .0295 Type (.0032 x 3 letters) .0096 Total .0391 Crossfoot the amount of VAT applicable at 2% (rate 1) and 4% (rate 2) (29) Enter digit in adding machine (.0033 x 4 digits) .0132 Depress add bar .0090 Repeat above .0222 Print total .0240 Total .0684 Additional typing of "total" (21) Position roller .0295 Type (.0032 x 5 letters) .0160 Total .0455 Adding total before VAT added amount and VAT amount to determine total amount (22) Assumes total before VAT amount is already in the machine Enter digits (.0033 x 4 digits for VAT) .0132 Depress add bar .0090 Print total .0240 Total .0462 272 Appendix C. Continued. '1' Wf wv-i Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation j Entering the total amount due (22) Read amount from tape (.0033 x 3) .0099 Read each added digit (.0027 x 3) .0081 Position roller .0295 Type [.0032 x (6 digits + 1 point)] .0224 Total .0699 Additional typing of special notes (24) Position roller and type letters Non-routine sales (.0295 + .0032 x 16) .0807 Self-delivery (.0295 + .0032 x 13) .0711 Export (.0295 + .0032 x 6) .0487 Buyer's purchases exempt from VAT (.0295 + .0032 x 33) .1351 Comparing an added total of a VAT rate column with column total on a sales invoice Read factor (.0033 x 3 + .0027 x 3) .0180 Comparing (.0090 + .0027 x 5) .0225 Tota1 .0405 Checking the VAT calculation for one VAT rate Calculating the amount of VAT .1071 Read factor (.0033 x 3 + .0027 x 1) .0126 Comparing (.0090 + .0027 x 3) .0171 Manual printing, 1 character (a checkmark) .0114 Tota1 .1482 Comparing crossfooting of VAT by rates with total VAT on a sales invoice Read factor (.0033 x 3 + .0027 x l) .0126 Comparing (.0090 + .0027 x 3) .0171 Total .0297 273 Appendix C. Continued. Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation Checking the total due Assumes total before VAT is in machine Calculating the total due .0462 Read total from tape (.0033 x 3 + .0027 x 3) .0180 Comparing (.0090 + .0027 x 5) .0225 Manual printing, 1 character (a checkmark) .0114 Total .0981 Annual listing of VAT on uncollectable accounts The listing consists of name of debtor, debtor's VAT registration number, and for each invoice unpaid the invoice number, amount of VAT, and the total amount. Time as a function of the number of accounts written off Type debtor name and VAT registration number [.0032 x (20 letters + 10 digits + 5 spaces)] .1120 Adding machine print total (.0240 x 2 columns) .0480 Type total [.0032 x (4 digits + point + 6 digits + point)] .0384 Finding grand total of list Enter VAT and depress add bar (.0033 x 4 + .0090) .0222 Enter total and depress add bar (.0033 x 6 + .0090) .0288 Time per account written off .2494 Time as a function of the number of invoices written off Withdraw invoices from file (assumed .0500) .0500 Assumed that invoices were grouped by customer. 274 Appendix C. Continued. __V V Minutes to Description of the Accounting Perform That Operation Related to a VAT Operat1on Type for each invoice [.0032 x (4 for invoice number + 4 for VAT amt. + 6 for total amt. + 2 points + 8 spaces)] .0768 Pick up invoice from top of pile .0245 Finding total for each firm Enter VAT and depress add bar (.0033 x 4 + .0090) .0222 Enter total and depress add bar (.0033 x 6 + .0090) .0288 Pick up invoice from top of pile .0245 Refile invoices (assumed .0500) .0500 Time per invoice written off .2768 Annual listing of VAT invoiced by customer The listing consists of the customer firm's name and VAT registration number, and the total VAT invoiced. AssUmed that invoices were grouped by customer Time as a function of the number of customers Type customer name and VAT registration number [.0032 x (20 letters + 10 digits + 5 spaces)] .1120 Adding machine print total .0240 Type total amt. of VAT [.0032 x (6 digits (assumed) + 1 point)] .0224 Pick up over 20 paper per group .1120 Time per customer .2704 Time as a function of the number of invoices Enter amount of VAT on invoice, in adder (.0033 x 4 digits) .0132 Depress add bar .0090 275 Appendix C. Continued. Description of the Accounting Operation Related to a VAT of Minutes to Perform That Operation Pick up sheet from pile Time per invoice Annual listing of VAT invoiced by the firm's suppliers The listing consists of the supplier's name and VAT registration number, the total amount invoiced and deductible, and invoiced and non- deductible. Assumed that VAT invoiced and non-deductible was so infrequent that it could be ignored. For the time to prepare this listing, see those times for preparing the annual listing of VAT invoiced by customer. Per supplier (customer) Per invoice Sorting documents from numerical sequence by invoice number into groups by VAT registration number (firm name) Table top sort = .0161 + .0006 per category up to 15 Sort into four groups of alphabet letters [.0161 + (.0006) (4)] = .0185 Sort into letters within each group [.0161 + (.0006) (6)] = .0197 Sort by firm name .0245 .0467 .2704 .0467 number of firms a 26 = average number of firms per letter a 15 categories = sorts.per letter x (.0161 + (.0006) (15) = (nunber of firms) (.0251) :— 290 = (number of firms) (.0001) Total time per invoice. [(.0382 + (.0001) (number of firms)] 276 Appendix C. Continued. Minutes to Description of the Accounting Perform That Operation Related to a VAT Operation Sorting documents from groups by VAT registration number into numerical sequence by invoice number Table top sort = .0161 + .0006 per category up to 15 Sort into 10 categories (0-9) [.0161 + (.0006) (10)] = .0221 Total time per invoice = (digits in total number of documents) (.0221) APPENDIX 0 SUMMARY OF ESTIMATED INTITAL COMPLIANCE COSTS BY FIRM FOR THE INVOICE METHOD OF COMPUTING THE VAT NOTE: The source of the dollar amounts for the estimated initial compliance costs is Table 19. om.mmw.p Om.mmm o mH.m mm.mom Hm.wsm om.Hmo o mm.osm o mo.omm popes agaps mH.m mH.m c mH.m o c o c c c o m 1. Haooomsaoooo so asasHooom msoms>oo uxop . . mm o . -sa p mapoHas opoopoooooa m.Esss a op oosp . 1am osa . papop pmwmp -aososss asp as assapsa>a so: HMNMp sass -osapm Essa aEMpmumwaMppmmws mpmoo mpmoo wwwmo so smVHooos>socH . 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A Nfi C APPENDIX E SUMMARY OF ESTIMATED CONTINUING COMPLIANCE COSTS BY FIRM FOR THE INVOICE METHOD OF COMPUTING THE VAT NOTE: The source of the dollar amounts for the estimated con- tinuing compliance costs is Table 20. 283 msOmH>Uo -xap soo osa cc.cm cc.cm c o c cc.cm c c c o a 1 asassasooso 1as aossooe cospoooooo Esss asp as.os as.ao o o as.as o o o o o s - so osspas 1sas so oaas Esss asp so AH.mAm mH.smm c o mH.Amm c mm.me c om.mc mm.om o o 1 saHHospooo so sasomaass Esss asp so sm.mmH mA.om o o mA.om o mo.ss c on. mo.mo o o 1 maaAoHoEa cospooooo< < zmHs A s s A m c o c m o Hsooas psoaas apos poz AHsoaam poz AHsooam mmww sasosoam assp wwwww» spoopoooooa m.ssss o op oosp 1pmom 1as osa Esps. mapaHas a o Hapop 1aasosos asp ms assassa>a 3o: Hapop . 1ooopm. . oapaespma pmoo H p s som som mpmoo asp o_osz op Esss mpmoo mpmoo oao so smVHooos>sooH Haooomsaoooz Haooomsas 1oomsac mpmoo paooomsac 1ooz mapoespma pmoo.soHpoo Haooomsaoooo soo paooomsao so aosoom .mosuompoom 1 pmoc aooassosou so aoAs Haoso>oH zmHs >m mc>H Am mhmou uuzm asp mcspcceou so oOspaz 284 mm.mwm._ ms.mnm co.mp mm.mms mm.mm mm.omn co.mA co.mps mm.~os oo.pm oo.om mm.mo om.smo mm.mmm co.ms cc.cm mm.mo om.omo mm.oom co.ms mm.mo om.omo ms.mmm oo.om mm.m? co.mm o_.sm mm.oom co.m» o o o op.ss om.~o mm.som papos msaps m 1 "aooomsacooo so msasscoom msoms>oa 1xap oa -xap sso asp mm.mop oo.om o o o oo.om mm.om o mm.om o o s 1 asaoopsooso 1as aossoos cospoooooo Esss asp ms.mo ws.so c o mm.mo o o o c c c z 1 so mospas 1sas so oaas Esss asp so mH.omm oc.mom c o oc.mcm c om.mm o oH.Nm cH. c o 1 saHHospooo so sasomaass Esss asp so mo.mmc.H oH.NmN c c NH.ocH mc.sm mm.AcA o Ac.mH Hm.omA o s 1 maaAoHosa cospooooo< o zmHs A s s A m c o o m < Hsooas Hsoaas apos poz AHsoaam poz AHHoaaa WNW” sasosaam assp wwwaw” mpoapoooooa m.EsHs a op oosp 1pm: 1am osa Esw . mapaHas a o Hopop 1ossosos asp ms aHsorso>a 3o: Hapop . m 1ooapm .s oapaespma pmoo H p s som som mpmoo asp Eos3 op Esss mpmoo mpmou Hao so AmVHooos>HooH Haooomsacooz Haooomsac 1oomsac mpmoo Haooomsao 1ooz maposspma pmoo saHHoo HaooOmsacooo ooo Haooomsac so ausoom 'Iln Ll||1 k Ml 14 [1' 1' .cosooppoom 1 pwom aooaHHooou so aoAH maoHo>oH 1 s<> asp cospoosoc so oospaz zmHs >m mc>s >m msmoo uuzm<22=m 286 mm.omm m~.oom co.m, mm.nmm mm.om oo.omm co.mn mo.ms mm.~mp oo.Hm oo.om mm.mo HH.oHo mm.mmm oo.o" oo.om mm.mo cm.omm mm.mmH co.ms mm.mo om.omm mm.omH cc.cm mm.m co.mm Fo.mm mo.mmH co.mw Fo.mm mo.os mm.sm~ Hapop msaps Haooomsaoooo so msaHHooom msoms>oa 1xop «so soo msaesosmosc 1as aossuoo mospooouu< Esss asp so oospas 1saE so oaa: osss asp so saHHospooo so sasomaass ssss asp so maaAoHoEa cospooooo< o zmHs mA.HHm.p om.mom co.m— mm.oom mm.mm mm.~mm co.mn om.mos Ho.oms oo.—m . ..sns- oo.o— A-c- ,Puao .- oo.oH co.mA co.mm Hapos moaps m 1 paooomsaoooo so msaHHocom 0" ..I"!’ - avru(.lr-49..,. ’51» I .v 951’ so fCerx o\.0¢ O O Iscé so Coy: 287 msomH>om 1xop «so now oo.om oo.om o o o oo.om o o o o o s 1 psaooasooso 1as aossooe cospoooooo Esss asp ms.so mm.oo o c ms.mo c o o c c c z 1 so cospas 1sos so oaas Esss asp so ss.omm mm.ms— c c mm.mAH o Ho.cm c Ho.cm c c o 1 saHpospoou so sasomaass Esss asp so Hm.occ.m mm.mmo.H c o mo.mcc mm.om mm.mmc o mm.mm mm.omm c o 1 maaAoHoEa mospoooooo m zmHs A s s A m c c u m < Hsoaas Hsoaas apos poz AHHooam poz AHHooam ”MW“ sasosaam aesp wwwmwn spoapoooooa m.EsHs a op oosp 1pmom 1as sso Esp . mapaHas o o Hapop 1aEsosos asp ms aHsoHHo>a 3o: Hapop . 1ooapm .s oapaespma pmoo H p s som som mpmoo asp sosz op esss mpmoo mpmoo Hao so AmVHaooH>HooH Haooomsacooz Haooomsac 1oomsac mpmoo Haooomsac 1ooz mapoespma pmoo saHHoo Haooomsaoooo soo Haooomsao so aosoom .mosoospoou 1 pmom aocoHHchu so aoAH maoso>oH.1s<> asp cospoceoo so oospaz oops so moss so asaoo aostpasoa so ssszzom 288 mp.mms.~ om.~AF.H co.m” om.~oo.H om.mFH Hp.a~o.p oo.ss so.mp om.oom.H o oo.Hm oo.om mm.mo mm.mAH oo.Nmo.~ co.mH oo.om mm.mo mm.mAH mm.mmm co.ms o oo.om mm.mo o mm.mAH o mm.omm om.mm co.mn Hm.mom.H co.mA mo.mo om.oom.H o G. l .apos meaps Haooomsaoooo so asasHocom msoms>oo 1xap oou soo msaEEosooso 1as aossoos cospooooo< osps asp so osppas 1sas so oaas osss asp so saHHospooo so sasomaass ssss asp so maaAoHoEa cospoooooo s zmHs ms.-o.u oo.H~m.H co.mH ms.o~N.H mm.om ms.HoH.s co.mA mH.Noo mm.omm o oo.Hm Anon ,nvnu co.mH A... co.mH a: .3: 3 co.ms co.mA m..- Hopes msaps Haooomsaosoo so msasHocom It n 1D;nl 1.. at!!! 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