How does value added tax work

How Does The Value-Added Tax System Work?

With all the talk surrounding taxes and debt and trade deficits, a new concept has sprung up in an attempt to offer some relief to the crippled U.S. economy. This concept is known as the value-added tax (VAT).

The VAT is a tax on consumption. Our current, flawed tax system taxes income, wealth, property or wages. The VAT differs from our current system because it is a tax only on the “value added” to a product. This would include material or service at every stage of its manufacture or distribution. However, the VAT is typically not applied to products such as food, clothing and housing.

Additionally, the VAT tax would dramatically reduce income taxes.

Here’s how it would work:

Imagine a $1 toothbrush from the supermarket with a VAT of 10%. There’s a manufacturer and supermarket in the production chain. The manufacturer makes the toothbrush and sells it to the supermarket. The supermarket sells the toothbrush to the customer. Each link on the production chain pays the government 10% of the price of its product minus 10% of the price it paid for the goods to make that product. Ultimately, the government collects a total of 10 cents on the $1 toothbrush. At the supermarket, the customer would pay the toothbrush price plus the VAT: $1.10.


this system may sound complicated, it is important to note that it would actually be much easier to collect VAT taxes than a national retail sales tax because there is a counter-party to every transaction.

The VAT would also benefit the U.S. economy where global trade is concerned.

Because the United States does not employ a VAT of our own, the U.S. is stuck between a rock and a hard place where international trade is concerned. Many of our trading partners employ the VAT, and as a result the tax works against us as an unfair system that makes it more expensive for U.S. companies to export their goods and subsidizes foreign exporters for their goods entering the United States. In fact, an average of 94 percent of all U.S. exports and imports are subject to a foreign VAT annually. This only further contributes to our massive trade deficit and the outsourcing of U.S. businesses and jobs.

The message is clear. In order for the U.S. to remedy its flailing economic health, and to become more competitive in the global market, our leaders must replace our current tax system with the VAT. Until our leaders act on this critical issue, U.S. businesses and taxpayers will continue to suffer.

Send this article to your congressional representative and to ten of your friends and ask them to do the same!


Category: Taxes

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