What is a ‘Value-Added Tax – VAT’
A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. VAT is most often used in the European Union. The amount of VAT that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.
Explaining ‘Value-Added Tax – VAT’
Value-added taxation is based on a taxpayer’s consumption of goods rather than his income. More than 160 countries around the world use value-added taxation. In America, advocates claim that replacing the current income tax system with a federal VAT would increase government revenue, help fund essential social services and reduce the federal deficit. Critics disagree, arguing that a VAT places an increased economic burden on lower-income taxpayers.
Pros and Cons of Value-Added Taxation
On the plus side, a VAT would collect revenue on all goods sold in America, including online purchases. Despite efforts to close tax loopholes that allow Internet businesses to avoid charging taxes to customers in states where they do not have a brick-and-mortar business, unpaid taxes on online sales cost states billions in potential income that could fund schools, law enforcement and other services.
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