Value added tax
A value added tax (VAT) is a consumption tax that is levied on the difference between the price paid by the seller and the price paid by the consumer for a good. At any stage of production and at the sale when value is added to a product, the VAT is charged. The VAT accumulates until the product is sold to a final consumer and at each stage producers are either refunded or pay their level of tax minus the previous amount.
Application of the VAT
- A producer extracts and sells crude oil to an oil refinery for the price of $50.00, $55.00 with the VAT.
- From this sale the extraction producer remits the $5.00 from the VAT to the government.
- The refinery refines the crude oil into gasoline for sale to gas stations at a price of $100.00, $110.00 with the VAT.
- Because the previous producer already remitted the $5.00 from their stage of production, the refinery only has to remit $5.00.
- Notice: Even though the sale price of the refinery product is $100.00 the value they added was only $50.00 because they paid $55.00 for the crude oil. If the value they added to the product by refining it was $50.00 then the tax is 10% on that $50.00, $5.00.
- Finally the gas station sells the gasoline to the consumer at a price of $150.00, $165.00 with the VAT.
- Just as before, the gas station will remit the $5.00 for the tax as the previous remissions have been made proportional to the value added at each stage.
VAT in Use
With the exception of the United States, all of the OECD countries use a VAT to collect consumption revenues. In 2012, VAT taxes accounted for 19.5% of total tax revenue in OECD countries and while this percentage fell slightly between 2005 and 2009 (during the economic crisis), the levels have remained steady since.
The VAT is advocated as a better alternative to the sales tax and income tax system used in the United States. this is because it is a tax on aggregate consumption rather than final consumption. This means that every time a product is bought or sold a tax is collected rather than just at the final sale of the product to the consumer.
- J.Black, N. Hashimzade, and G. Myles. (2009) "Value-added Tax." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-3285?rskey=L50wN3&result=1, 2009 [Aug 14, 2016]
- "A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].
- OECD (2014),Consumption Tax Trends 2014, OECD Publishing. [Online], Available: http://dx.doi.org/10.1787/ctt-2014-en, 2014[Aug 14, 2016]
- W. G. Gale and B. H. Harris. A VAT for the United States: Part of the Solution. Tax Analysts, 2011,pp. 1-2.