Value Added Tax
A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
Value-added taxation is based on taxpayers’ consumption rather than their income. In contrast to a progressive income tax, which levies greater taxes on higher-level earners, VAT applies equally to every purchase.
- A value-added tax, or VAT, is added to a product at every point on the supply chain where value is added.
- Advocates of VATs claim that they raise government revenues without punishing success or wealth, while critics say that VATs place an increased economic strain on lower-income taxpayers and bureaucratic burdens on businesses.
- Although many industrialized countries have value-added taxation, the U.S. is not one of them.
How a Value-Added Tax Works
A VAT is levied on the gross margin at each point in the manufacturing-distribution-sales process of an item. The tax is assessed and collected at each stage, in contrast to a sales tax, which is only assessed and paid by the consumer at the very end of the supply chain.