What is value added tax?

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A value added tax, or VAT, is a more complicated version of a sales tax.
In the US, most states enforce a sales tax on goods and services. For example, if there is a 10% sales tax and you buy a $100 item, you pay $110. The merchant collects your ten dollars and sends it to the government.
In Europe and other parts of the world, VATs are the more common form of consumption tax. A VAT is only charged on the value added and the stage of production or distribution. For example, if there is a 10% VAT and you buy a £100 item, but the merchant paid £50 when they bought the item from the manufacturer, the manufacturer will pay a VAT of £5.
As the name says, the tax is calculated on the amount of value that specific portion of the "distribution chain" added to your cost.
To make things more complicated, VATs are usually completely hidden from the consumer. Prices are quoted to you inclusive of the VAT. The business bears the entire burden of collecting the tax for the state, and you never know about it.
A value-added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price.
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