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If a value-added tax (VAT) were chosen to supplement or replace some portion of the revenue from the income tax, a choice would likely be made between the credit-invoice method and the subtraction-method for calculating VAT liability. Credit-invoice method VATs and subtraction-method VATs are, at a conceptual level, very similar taxes. The key substantive difference between most subtraction-method VAT proposals and extant credit-invoice method VATs is that subtraction-method VAT proposals generally do not impose an invoice requirement. The invoice requirement substantially reduces tax avoidance opportunities in the VAT, and also ensures the ability to provide appropriate treatment for exports while remaining consistent with international trade obligations under the World Trade Organization (WTO). Further, the perceived difference between the subtraction-method VAT, as a tax on an entity, and the credit-invoice method VAT, as a tax on specific goods could affect policy decisions with respect to important design features. The relevant design features include whether to exempt certain supplies of goods or services by certain entities, whether to tax supplies of some goods or services at lower rates, the taxation of nonprofit organizations, state and local government, real estate, financial services, and small business, and how to treat imports, exports, and negative taxable value-added. On balance, credit-invoice method VATs seem more likely than subtraction-method VATs to be adopted with VAT design best practices.

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63 Tax L. Rev. 309-358 (2010)