What Is a Value-Added Tax (VAT)?

VAT Definition

A value-add tax is a tax charged on the gross profit of every step in the supply chain.

It’s best understood using an example:

The country of Decivat has a 10% value added tax.

A flour manufacturer will buy $1,000 worth of grain from a farmer for $1,100, $100 of which will go to the government as VAT, to create flour.

If the manufacturer sells the flour to a baker for $1,500, he will charge $1,550 since a 10% VAT is imposed on the gross profit of $500.

A value-added tax is the most common form of consumption tax for industrialized countries with over 160 countries levying a VAT, excluding the United States.

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VAT Advantages

Advocates of the tax claim the following:

  • It helps raise government revenues without punishing wealth or success (like income tax)
  • Replacing other taxes with a VAT would close tax loopholes
  • It is based on consumption and therefore encourages saving

VAT Drawbacks

Those against a VAT argue the following:

  • A VAT would be felt less by the wealthy as lower-income earners would pay a higher percentage of their earnings in taxes with a VAT system
  • A VAT creates higher costs for businesses
  • Local governments are unable to set localized tax rates

Learn More

We hope this has helped you understand the concept of VAT. If you have any more questions about the topic, please feel free to reach out to a financial advisor in Manchester, MO. For those of you who live outside the locality, check out our financial advisor page to see the list of areas we serve.

What Is a Value-Added Tax (VAT) FAQs

VAT stands for Value-Added Tax.
A value-added tax is a tax charged on the gross profit of every step in the supply chain.
Advocates of the VAT claim that it helps raise government revenues without punishing wealth or success. Replacing other taxes with a VAT would close tax loopholes. It is based on consumption and therefore encourages saving.
Those against a VAT argue that it would be felt less by the wealthy as lower-income earners would pay a higher percentage of their earnings in taxes. A VAT creates higher costs for businesses, while preventing local governments from setting localized tax rates.
A VAT system is found in many European countries, but the U.S. does not utilize it.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.