Taxes, Lawyers, Business & Debt
What is VAT (Value Added Tax)?
A VAT, or value added tax, is a sort of consumption tax that is assessed on services and goods at each production step. The way that a VAT is implemented sounds a little bit complex, but it is meant to more evenly distribute the tax burden, and it can be a source of higher tax revenue without placing an undue burden on any one group. In practicality, a nation that has a VAT tends to tax the poorer people more than others, which is a reason why the VAT has been so sharply criticized by some groups.
A value added tax works like this: At each stage of a process, from constructing an item until the time the customer pays for it, the product is taxable. The tax assessed is a percentage of the item's value, less the taxes paid by the people in the consumer chain before. Here is an instance: A clothing maker could buy fabric for $150 a bale, and pay a 10% tax of $15 per bale. When the maker sold the cotton to a lingerie store for $130 per bale, their tax liability would be $13 per bale, but since ten dollars had already been paid, the retailer would only be liable for $3. A person buying a bale of the fabric for $200 would pay $20, minus the $13, equaling $7.
Under the VAT system, every time a product's value increases, it gets taxed. VAT is more common in Europe than anywhere else in the world. It was first used in France in 1954, and later adopted by more European nations. Today, the value added tax brings significant tax revenue for many European governments, and it is a point of contention for many, as some people don't agree with consumption taxes' disproportionate penalty to the poor. VAT amounts can vary widely, with rates ranging from 10% to 30%. People visiting nations with a value added tax can often get a refund for products they are taking from the country, although this step requires filling out paperwork and negotiations with customs. Some businesses can get VAT refunded as well.
The VAT is sometimes known as a "goods and services tax" or GST, and it is also meant to dampen the market for counterfeit and smuggled goods. In areas with high sales taxes, the market for illicit goods (which allow people to avoid the sales tax entirely) is high, and VAT and GST taxes highly discourage this behavior.