Value-added tax

A value-added tax (VAT) is a tax on the increase in value of a product at each stage of production and distribution, from raw materials to retail. Each business charges the tax on its sales and deducts the VAT it paid on its purchases, so that the tax effectively falls on the final consumer, while the government collects it in installments along the way.

More than 160 countries use a VAT or a similar goods and services tax, including all members of the European Union, with rates commonly ranging from about 5 to 25 percent. The United States has no federal VAT but relies on state and local retail sales taxes, and has income and payroll taxes at the national level.

Supporters, including some economists and conservatives who favor taxing consumption instead of income, say it is efficient, broad-based, hard to avoid and raises large revenue at low rates. Some on the left have proposed it to finance social programs. Opponents on the right fear that it would be an additional source of revenue that would enable bigger government, while others note that it is regressive unless offset by credits. Differences from a national sales tax include the collection stages and compliance.