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

A Comparison of the Tax Burden on Labor in the OECD

May 19, 2021

Options for Reforming America’s Tax Code 2.0

April 19, 2021

Insights into the Tax Systems of Scandinavian Countries

February 24, 2021

The European Commission and the Taxation of the Digital Economy

February 4, 2021

Consumption Tax Policies in OECD Countries

January 26, 2021

2020 VAT Rates in Europe

January 9, 2020


Related Articles

Testimony: EU Parliament Subcommittee on Tax Matters Hearing on the Impact of National Tax Reforms on the EU Economy

October 11, 2021

A 15 Percent VAT Rate Is Possible by Scrapping Reduced Rates

September 13, 2021

Comparing Three Financing Options for President Biden’s Spending Proposals

August 3, 2021

Asian and Pacific Countries Faced Revenue Loss Prior to COVID-19 Outbreak

July 27, 2021

A Comparison of the Tax Burden on Labor in the OECD

May 19, 2021

Reviewing Options to Raise Tax Revenue and the Trade-offs for Economic Growth and Progressivity

May 3, 2021

OECD Report: Tax Revenue as a Percent of GDP in Latin American and Caribbean Countries Is below the OECD Average

April 28, 2021

Options for Reforming America’s Tax Code 2.0

April 19, 2021

IMF Tax Proposals: Shrink Inequality or Sink Post-Pandemic Recovery?

April 12, 2021

New Hampshire Bill Aims to Reduce Tax Burden on Businesses

March 4, 2021

Reliance on Consumption Taxes in Europe

March 4, 2021

An Investment Boost in the UK’s 2021 Budget

March 3, 2021

Insights into the Tax Systems of Scandinavian Countries

February 24, 2021

Brits to Prepare for Tax Reforms

February 22, 2021

The European Commission and the Taxation of the Digital Economy

February 4, 2021

Value-added Taxes in the Pandemic

February 1, 2021

Actionable VAT Policy Gap in Europe

January 28, 2021

Consumption Tax Policies in OECD Countries

January 26, 2021

2021 VAT Rates in Europe

January 7, 2021

OECD Report: Tax Revenue in African Countries

November 17, 2020