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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?

#### Solution Preview

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

\$2.19