The VAT Blueprint: How It Works—and How Fraudsters Drain the System
One of the options to replace the $4.8 trillion presently being collected by the federal income/payroll tax system is the value added tax (VAT).
Today, over 170 countries rely on the VAT as their primary revenue engine. Like the FAIRtax, the VAT is a consumption tax. Unlike the estimated three million entities that would collect and pay the FAIRtax, approximately eight million US entities would be responsible for collecting and paying the VAT.
How a VAT Works
Unlike the FAIRtax, which is collected once at the final retail purchase of a new retail product or retail service, VAT is collected in "fractions" at every stage of a product's journey including the final retail purchase.
The Credit-Invoice Method
Most nations use the Credit-Invoice Method. Every time a business buys a component (like wood for a chair), they pay VAT to their supplier. When they sell the finished chair to a retailer, they collect VAT. When the retailer sells the chair they collect the VAT from the retail purchaser.
Each business in the chain of production then performs a calculation:
- Output Tax: The VAT they collected from their wholesale or retail customer.
- Input Tax: The VAT they already paid to their suppliers.
- The Remittance: They only pay the government the difference.
This creates a "paper trail" where one company’s tax deduction is another company’s tax liability. In theory, this makes the system "self-policing" because businesses need valid invoices to claim their credits.
The Achilles' Heel: The Refund Mechanism
The system's biggest vulnerability is the VAT Refund. If a company pays more VAT on its inputs than it collects on its outputs—common for exporters or startups making large equipment purchases—the government writes them a check to refund the difference. Fraudsters exploit this by creating fake "paper" businesses that issue fake VAT receipts that show VAT was paid by a company when it was not and allowing the company to get a check from the national treasury.
China’s Golden Tax Battle
China uses the Golden Tax System which requires every invoice to be issued through government-monitored hardware. Despite this, "Labor Dispatch" fraud remains common, where shell companies issue invoices for "consulting services" that never happened to help real firms lower their tax bills or actually receive payments from the government.
Brazil’s "Noteiras"
Brazil’s complex system has led to the rise of Noteiras—shell companies registered using “straw men” (often the identities of the poor or deceased). These firms issue millions in fake invoices over a few months and then vanish before the state can audit them.
India’s “Benami” Crisis
India has faced a massive surge in fake GST invoicing. Fraudsters harvest the identities of daily wage laborers to register "Benami" (proxy) firms. Indian authorities recently detected billions of dollars in tax evasion linked to these digital ghost networks.
Carousel Fraud: The Cross-Border Weapon
Within regions like the European Union, goods move tax-free between member states. This has birthed Carousel Fraud.
In this scheme:
- A company buys goods tax-free from another country.
- They sell them domestically, charging VAT to the buyer.
- The trader disappears without paying that VAT to the government.
- The buyer (who may be part of the scam) then exports the goods and claims a refund from the government for the tax that was never actually paid.
The "Zapper": Deleting Reality
In the retail and hospitality sectors, fraud is digital. Electronic Sales Suppression (ESS) tools, or “Zappers,” are software programs or USB drives that selectively delete cash sales from a restaurant’s Point of Sale (POS) system. By “zapping” 20% of the day’s sales, the owner keeps both the hidden income and the VAT they collected from the customer.
Conclusion
The VAT is used around the world and is favored by many in our Congress because it is included in the price of goods and often not disclosed on the receipts issued to the retail purchaser.
According to data analyzed by the Committee for a Responsible Federal Budget (CRFB) using CBO estimates for the 2026–2035 period, a 5% broad-based VAT would raise approximately $3.5 trillion over 10 years, or an average of $350 billion per year.
Extrapolating, we see that a U.S. VAT rate of over 70% will be needed to replace the nearly $5 trillion now being raised by the income/payroll tax system.
The IRS Commissioner has admitted that our federal income/payroll tax system suffers from over a $1 trillion of evasion each year. While the VAT evasion numbers vary from countryto country, the evasion amount is estimated to be around $500 million around the world and their rates are generally between 15% to 25%.
If VAT tax in the US is 70%, then the U.S. VAT evasion will almost certainly greatly exceed evasion under the FAIRtax with a 23% rate.
A U.S. VAT will be evaded more than the FAIRtax because of the fact that over 90% of the FAIRtax will come from less than 10% of the retailers and, because of the way the VAT works, more opportunities will be available for a company to evade the VAT.
While all alternatives to the income/payroll tax system need to be carefully examined, it is clear that the best alternative is the FAIRtax, a national retail sales tax on new retail goods and retail services which provides a family credit so that all purchases up to the poverty level for each family are not taxed. There is no withholding from your paycheck and YOU NEVER HAVE TO FILE A TAX RETURN TELLING THE GOVERNMENT HOW MUCH YOU EARNED AND HOW MUCH YOU SPENT, AND YOU’LL NEVER BE HARASSED BY THE IRS EVER AGAIN.
Many of you have labored tirelessly for freedom from the federal income tax and the IRS. You deserve a great deal of credit for your efforts to educate the American people on the need to fund the American government in a way that is good for America and returns freedom to the American people.
It is imperative, though, that we don’t replace the current income tax and the IRS with an alternative system that can still be manipulated by the Ruling Elite. We must let Congress and the President know that the best way to replace the income tax and the IRS is with the FAIRtax.
Make no mistake about it. The FAIRtax is a grave threat to the Ruling Elites. It will strip them of their power and their ability to control us though the tax system. Their opposition to the FAIRtax will be fierce and unrelenting. And don’t think for an instant that they won’t use half-truths, deception and downright lies in their desperate attempt to hang on to their power.
However, with the support of this President, we can finally eliminate the income tax and the IRS!!!
Of course, the best course of action is to not only repeal the income tax and abolish the IRS but to repeal the 16th Amendment as well so no future administration can ever shackle the American people with an income tax again.
We must come together and ensure that real tax reform, the FAIRtax, is not subverted by the Elites in D.C.
This will take the diligent efforts of all of us. We need your financial assistance, and we need your grass roots assistance.
If you have contacts that will allow us to get more information to President Trump about the FAIRtax please let us know.
Please email us at info@fairtax.org and we will give you some options on how you can best help us.
At a minimum, please call your Congressional representative and ask if he or she supports the FAIRtax. If so, thank him/her for their support and suggest they become a cosponsor of HR-25 if they’re not one already. If not, ask why not. If your representative claims to be unfamiliar with the FAIRtax, offer to have someone come to their office and explain it to them.
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