Value Added Tax

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A Value Added Tax (VAT) is a national sales tax paid by companies based on the value they add to a product at various stages of production or distribution. It is common in Europe but has been rejected by the U.S. Congress.

The tax is paid at each stage of production, but a credit is received for tax paid on inputs. For example, assuming a VAT rate of 10%, if a company sold its product for $100.00 and the cost of inputs to make that product were $80.00, they would have to pay $10.00 less an input credit of $8.00 to account for the VAT paid by their suppliers.

While some conservatives may mistakenly assume that the VAT tax is "more optimal" because it is a regressive tax, in reality, the VAT tax is similar to a corporate net income tax, except broader in the sense that certain items like labor, rent, and capital, for which a VAT tax has not previously been paid on, are not deductible.[1] FairTax, which supports a national sales tax, is opposed to a national VAT tax.[2] In the UK at least, conservative governments have tended to raise VAT. Margaret Thatcher's government raised VAT to 17.5% in the 1980s; the Labour government temporarily lowered it to 15% following the credit crunch in the 2000s; and now David Cameron's Conservatives have raised VAT to 20%.

In the UK, certain goods deemed necessities, such as food and children's clothing, are exempt from VAT. However, this exemption has tended to lag behind societal change, so that many products that most people would now consider necessities, such as telephones and certain hygiene products, are not VAT-exempt.

See also