Help us achieve a world where the tax code doesn't stand in the way of success.
The Tax Foundation is the nation’s leading independent tax policy nonprofit. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and global levels. For over 80 years, our goal has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity.
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.
July 14, 2016
