Value-Added Tax

Value-added tax

Tax added onto a product during each step of production, from raw material to finished good.

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Value-Added Tax

A tax levied at each stage in the production of a good or service that results in value being added to the product. For example, a timber company pays a percentage on the timber it sells to a miller. The miller then pays the same percentage (less what the timber company paid) on the timber it has refined into planks of wood, which it then sells to a carpenter. The carpenter likewise pays the same percentage (less what the timber company and miller paid) on the planks of wood he/she makes into a table, which he/she then sells to a customer. Proponents of a VAT state that each person or company along the supply chain has an incentive to ensure that every other person or company pays the VAT, reducing the likelihood of tax evasion. They also argue that it is more straightforward than other taxes because there are no exemptions or loopholes. Opponents of a VAT counter that the tax is regressive and unduly harms poor people, who, as a rule, spend more of their discretionary income on necessary items.

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value-added tax (VAT)

A tax levied on increases in a product's value at each stage of production and distribution. The value-added tax, essentially an invisible sales tax included in the final price, is ultimately paid by consumers. For example, a candy maker paying $10,000 for ingredients used in the manufacture of chocolate bars that are resold for $15,000 would be required to pay a tax on the $5,000 of value added to the product. Proponents of the value-added tax argue that it should be substituted for the current federal income tax to stimulate consumer saving. Compare consumption tax.