Calculating the Optimal Small Business Exemption Threshold for a U.S. VAT

71 Pages Posted: 2 Jun 2014 Last revised: 16 Jan 2015

See all articles by Edith Brashares

Edith Brashares

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Matthew J. Knittel

US Department of Treasury

Gerald Silverstein

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Alex Yuskavage

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: May 30, 2014

Abstract

Most countries with a VAT have a tax exemption for small businesses that have taxable sales below a certain threshold. The exemption reduces both the compliance costs for small businesses and the administrative costs for the government. We use a static analysis of the U.S. economy to determine the optimal level of taxable sales for this threshold and analyze the potential behavioral response by businesses. For a 10 percent VAT rate, we find that the optimal level for the threshold in the United States is $200,000, and that behavioral responses may be significant close to the threshold.

Keywords: VAT, small business, threshold

JEL Classification: H21, H25

Suggested Citation

Brashares, Edith and Knittel, Matthew J. and Silverstein, Gerald and Yuskavage, Alex, Calculating the Optimal Small Business Exemption Threshold for a U.S. VAT (May 30, 2014). National Tax Journal, June 2014. Available at SSRN: https://ssrn.com/abstract=2443979

Edith Brashares (Contact Author)

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States
202-622-0463 (Phone)

Matthew J. Knittel

US Department of Treasury ( email )

1500 Pennsylvania Ave., NW
Washington, DC 20020
United States

Gerald Silverstein

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

Alex Yuskavage

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

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