Value-Added Tax - VAT

For more information on value-added tax, visit Britannica.com.

A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. Value-added tax 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.

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For example when a television is built by a company in Europe the manufacturer is charged a VAT on all of the supplies they purchase for producing the television. Once the television reaches the shelf, the consumer who purchases it must pay the VAT that applies to him or her.

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A form of Consumption Tax levied on the value added to a product at each stage of its manufacturing cycle as well as at the time of purchase by the ultimate consumer. The value-added tax is a fixture in European countries and a major source of revenue for the European Union (EU). Advocates of a value-added tax for the U.S. Contend that it would be the most efficient method of raising revenue and that the size of its receipts would permit a reduction in income tax rates. Opponents argue that in its pure form it would be the equivalent of a national sales tax and therefore unfair and regressive, putting the greatest burden on those who can least afford it. As an example, for each part that goes into the assembling of an automobile, the auto manufacturer would pay a value-added tax to the supplier, probably a percentage of the purchase price, as is the case with a sales tax. When the finished car is sold, the consumer pays a value-added tax on the cost of the finished product less the material and supply costs that were taxed at earlier stages. This avoids double taxation and thus differs from a flat sales tax based on the total cost of purchase.