Value Added Taxes

A VAT is similar to a sales tax, except that it is paid at all levels of production, on only the value added at each level, to prevent pyramiding and eliminating the need to separate business inputs from retail sales.

For example, take a wooden table sold at retail and a 10 percent VAT rate. The lumber company sells the wood to the furniture maker for $50, paying $5 (10% of $50) to the government. The furniture maker sells the table to the retailer for $120, sending $7 ($120 – $50 = $70 X 10% = $7) to the government. The retailer sells the finished table to a customer for $150, sending $3 to the government ($150 – $120 = $30 X 10% = $3). The total tax paid is $15, or 10% of the final retail price.

Advocates of VATs say this structure reduces evasion because it’s harder for three entities to avoid paying a $15 tax than it is for one. This in turn allows VAT rates to be much higher than ordinary sales taxes (which suffer evasion as they move into double digits), and they can generate huge sums of money.


Featured Research

2020 VAT Rates in Europe

January 9, 2020

Italy Can Pay for a Flat Tax

June 12, 2019

Reliance on Consumption Taxes in Europe

May 16, 2019

VAT Rates in Europe

February 28, 2019


Related Articles

New European Commission Report: VAT Gap

Revenue Gains in Asian and Pacific Countries Likely Offset by COVID-19

Global Tax Relief Efforts Vary in Scope and Time Frame in Response to COVID-19

Germany Adopts a Temporary VAT Cut

VAT Bases in Europe

Denmark Unplugs the Economy

Key Tax Provisions from the UK’s 2020 Budget

Insights into the Tax Systems of Scandinavian Countries

2020 VAT Rates in Europe

What’s on the Tax Policy Agenda at the EU

Tax Competitiveness is on the Agenda in Greece

UK Taxes: Potential for Growth

Standard VAT Rate on German Meat?

Tax Revenue in Asian and Pacific Economies

Aviation Taxes in Europe

Does Andrew Yang’s “Freedom Dividend” Proposal Add Up?

Italy Can Pay for a Flat Tax

Reliance on Consumption Taxes in Europe

Complexity of the VAT in Europe

VAT Rates in Europe