Value-added tax

Value-added tax (VAT), tax on the value added to goods or services at each stage in their production and distribution. It originated in France in 1954 and was later extended throughout the European Economic Community; it has been considered at various times in the United States. In effect, VAT is a sales tax computed on the difference between what a producer pays for a raw material or semifinished product and what he or she sells it for. The cost of the tax is borne ultimately by consumers. It is a regressive tax because it bears most heavily on low-income people, who spend more and save less than those with high incomes. For government, VAT has the advantage of being broader than most sales taxes and thus producing large revenues even at low rates. The tax is virtually self-enforcing; producers who make tax payments submit claims for credit for the taxes included in their suppliers' prices, and this tends to discourage nonpayment along the line.

See also: Taxation.