Value Added Taxes

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Value Added Taxes are common in most European countries, which use it instead of the retail Sales Taxation found in the U.S. The VAT is typically imposed on almost all goods and services at every stage of the production process, not just the retail level. And, VAT is typically included in prices implicitly, rather than displayed at the point of sale.

In a VAT, a business calculates its gross revenues, and subtracts payments it made to other businesses (such as inventory purchases and charges for subcontracted services) and pays the VAT on the difference which is usually a fairly close approximation of payroll plus profits.

A VAT is a form of Consumption Tax. Consumers ultimately bear the VAT charges incurred at every level of production for the things they buy, but VAT does not apply at all to income which is saved and invested, rather than spent on goods and services.

The VAT is less regressive than the U.S. Sales Tax because it has a wider tax base, and for the same reason is a more stable tax base than a U.S. sales tax. But, a VAT is still less progressive than an income tax, because an income tax includes in its tax base money that is earned and invested, while a VAT does not, and higher income people have more money to save and invest.

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