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.[1] 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

This chart illustrates how a VAT applies to the production of gasoline:[2]

 Stage of Production Sale Price ($) With VAT (10%) Gross VAT Amount ($) Net VAT Rendered ($) Crude oil$50.00 $55.00$5.00 $5.00 Refined to Gasoline$100.00 $110.00$10.00 $5.00 Gasoline (final)$150.00 $165.00$15.00 $5.00 Total - - -$15.00
• 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.[3]

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.[4]