Value Added Tax

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.

Related Articles

How Scandinavian Countries Pay for Their Government Spending

June 10, 2015

Sources of Government Revenue in the OECD, 2014

November 12, 2014

The Tax Code Isn’t Good at Fighting Inequality

October 9, 2014

Estonia has the Most Competitive Tax System in the OECD

September 29, 2014

2014 International Tax Competitiveness Index

September 15, 2014

Japan Raises Sales Tax Rate

April 2, 2014

Links: Profit Shifting Solutions and Internet Sales Taxes

September 18, 2013

Typical News Day in Europe

January 13, 2012

U.S. Corporate Income Tax Rate Approaching Twice the World Average

November 15, 2011

Cain Train Stops in DC

October 31, 2011

Some Rather Important and Unspecified Details of 9-9-9

October 17, 2011

What would Warren Buffett pay under 9-9-9?

October 14, 2011

Three Reasons the Downgrade Makes Sense

August 8, 2011

The Proper Role of Taxes in Deficit and Debt Reduction

July 29, 2011

From the Archives: Tax Foundation Corporate Tax Burden Studies from the 1980s

July 25, 2011

VATs — Even Cash Cows Have Their Limits

July 25, 2011

Is the U.S. a “Low Tax” Country?

July 8, 2011

VAT Rates Needed to Erase Obama Deficits

February 16, 2011

The VAT as “Money Spinner”

January 11, 2011

New Deficit Reduction Proposal Includes a VAT

November 17, 2010