Value Added Tax (VAT) – What it means to us

Value added tax (VAT), or goods and services tax (GST) is a consumption tax levied on value added. In contrast to sales tax, VAT is neutral with respect to the number of passages that there are between the producer and the final consumer; where sales tax is levied on total value at each stage, the result is a cascade (downstream taxes levied on upstream taxes). A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the tax.

A VAT taxes the transfer of goods and services every step of the way, from their manufacture or initiation to their final purchase. From a government’s point of view, a VAT is a wonderful tax because, as the Post story reports, “producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT.” So, it’s hard to dodge. It punishes spending rather than saving, which would represent a U-turn for the American economy, which has been rewarding spending and penalizing saving for many years.

It is, of course, a terribly regressive tax, whose burden falls disproportionately on people struggling to make ends meet. That our lawmakers are reportedly intrigued with this kind of tax is a measure of their desperation. Of course, the advocates for a VAT argue that it would make possible the elimination of income taxes for the majority of voters. That really isn’t likely, though, given the proven bottomless appetite of governments for ever more money.

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