What is Value-Added Tax (VAT)?

Published by Thomas Herold in Economics, Laws & Regulations

'Value-Added Tax (VAT)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Value-Added Tax (VAT) turns out to be a kind of tax on consumption which governments place on all products. What makes this different from a sales tax is that whenever any value becomes added along the stages of production as well as at the final register, the VAT tax is applied.

These Value-Added Tax fees are commonly utilized within the European Union which is also the heaviest user of them in the world. The total VAT which end-users pay proves to be the difference between the product’s cost minus the materials’ cost which were utilized in making the product (which have already been taxed).

A good example to look at is a television set constructed by a manufacturer in Germany. The maker pays VAT on each of the various components it buys in order to produce the TV. After the set arrives in stores, the individuals who buy it must also pay the appropriate amount of Value-Added Tax.

Value-Added Tax is not based on income as with other forms of taxes. Rather it relies on the amount of goods which consumers purchase and consume. Over 160 different nations rely on VAT for at least partial funding of government budgets. The United States is strangely absent from this list of well over 75 percent of the countries on earth.

Advocates for implementing a VAT in the U.S. argue that by replacing the present inefficient income tax system in America with such a national VAT, this would offer numerous advantages. Among these are that it would lower the national deficit and debt, pay for critical social services, and boost government revenues.

Critics of the Value-Added Tax for the U.S. claim that such a tax is inherently regressive. This means that it would require the poor and low income workers to shoulder a greater economic burden and responsibility for funding the government outlays.

Both sides of the debate are in fact correct. In the advantages column, such a Value-Added Tax would bring in massive revenues on every product which traditional American stores, businesses, and Internet-based businesses sell. This would be a boon for government coffers that typically miss out on sales taxes which can not be levied on businesses that avoid sales taxes with customers (in those states where the businesses do not have any physical offices). It would collect presently unpaid billions in taxes from online sales that could be deployed then to pay for law enforcement, schools, and many other social services. Besides this, a VAT would ensure it is far harder to avoid paying taxes. It would further simplify the complicated and bureaucratic federal tax regulations so that the Internal Revenue Service could be massively downsized and made more efficient at the same time.

There are also a number of possible downsides to the VAT, per opponents of the concept. Business owners would suffer from higher costs all along the chain of goods production. A national VAT would also cause potential disputes between the Federal government and those many local and state governments which already charge sales tax rates set on local and statewide levels.

Critics also correctly point out that the consumers bear the ultimate brunt of the tax in the form of higher consumer goods prices, thanks to a VAT. The theory is that the burden of the tax spreads out through each phase of making goods from inputs to the ultimate product. The reality is that higher costs are nearly always passed off on the poor consumers.

As VAT applies equally to all purchases and for all types of salary and wage earners throughout the jurisdiction in which it applies, this would harm lower wage workers than higher ones. Higher wage earners are able to save massive percentages of their income, which would then not be taxed. Lower wage earners live from paycheck to paycheck. As they spend all of their earnings each month, their share of the VAT tax would be proportionally far higher than the wealthy Americans’ share.

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The term 'Value-Added Tax (VAT)' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.