Value-Added Tax (VAT)

A VAT is similar to a sales tax, except that it is paid incrementally 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 statutory rates to be much lower than those of ordinary sales taxes, raising the same amount of revenue more efficiently.


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

Italy Can Pay for a Flat Tax

June 12, 2019


Related Articles

VAT Bases in Europe

A Comparison of the Tax Burden on Labor in the OECD

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

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

Options for Reforming America’s Tax Code 2.0

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

New Hampshire Bill Aims to Reduce Tax Burden on Businesses

Reliance on Consumption Taxes in Europe

An Investment Boost in the UK’s 2021 Budget

Insights into the Tax Systems of Scandinavian Countries

Brits to Prepare for Tax Reforms

The European Commission and the Taxation of the Digital Economy

Value-added Taxes in the Pandemic

Actionable VAT Policy Gap in Europe

Consumption Tax Policies in OECD Countries

2021 VAT Rates in Europe

OECD Report: Tax Revenue in African Countries

Spain’s Recovery Budget Comes with Tax Hikes

A Framework for the Future: Reforming the UK Tax System

New European Commission Report: VAT Gap