VAT Tax at a Glance

The VAT tax is a consumption tax imposed on the value of a product, at each stage that it is manufactured or distributed to those that purchase the completed item. Once the completed item is purchased, the entire tax is generally passed onto the individual or entity buying that product. Although the tax has been paid by those that manufacture the product, possibly several times, the final price of the product usually allows those individuals or entities to recoup those monies.

Like many forms of taxation, the VAT tax is considered regressive, as it taxes those with a lower income at a higher percentage of their salary. However, it is also argued that the wealthy make more purchases, including more expensive items, thereby increasing their tax burden.

The value added tax has been proposed as a replacement to the sales tax in the United States. The value added tax only taxes the value added at each stage of production of that item. For example, those companies which only add small items to a completed item, such as screws, would be taxed at a lower rate than those that add more sophisticated parts to the item.

The value added tax is proposed as a replacement for the sales tax, as it spreads the tax burden more fairly to those that manufacture products and to the individual or entity that ultimately buys the completed product.