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A Discussion Of Value Added Taxes

1. A furniture manufacturer sells $500,000 worth of tables, chairs, and other items in a given year. The manufacturer earns a profit of $100,000 that year. His purchase invoices indicate that he bought $200,000 worth of lumber, varnish, nails, and other materials during the year. His labor costs were $150,000, and he purchased $50,000 of new equipment that year. Calculate his tax liability under a 15% consumption type VAT. Give examples of different types of alternative VATs, and explain their use.

2. What is a VAT? Give an example of VAT in other nations.

3. What is the difference between centralized and decentralized government? What are the advantages of a federal system of government?

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Please find the tutorial below.
Question 1
The computation of the net tax liability as regards consumption type value added tax (VAT) is straightforward. One needs only to net the input and output VAT
Tax liability = Output Vat - INPUT vat = $75,000-$37,500=$37,500

Output VAT = Sales x VAT rate = $500,000 x 15% = $75,000
Input VAT = (Purchase invoices + Equipment purchase) x VAT rate = ($200,000+$50,000) x 15% = $37,500

Alternatives to VAT include
1. RST or retail sales tax which acts like VAT but takes into account whether the buyer is a registered business and if it is, then the tax is ...

Solution Summary

The solution discusses the value of added taxes