value-added tax

value-added tax (VAT), levy imposed on business at all levels of the manufacture and production of a good or service and based on the increase in price, or value, provided by each level. Because the consumer ultimately pays a higher price for the taxed commodity, a VAT is essentially a hidden sales tax. Originally introduced in France (1954), it is now a major part of the tax structure of most Western European nations. In the early 1990s the U.S. government considered instituting a VAT to fund national health care programs.

---

value-added tax (VAT)

Government levy on the amount a firm adds to the price of a goods or services as value is added—that is, at each step of their production and distribution. In the most common method of calculation, the seller subtracts the sum of taxes paid on items being purchased from the sum of all taxes that have been collected on the items being sold; the net tax liability is the difference between the tax collected and the tax paid. The burden of the value-added tax, like that of other sales taxes, tends to be passed on to the consumer. To limit the VAT's regressiveness, most countries set lower rates for consumer necessities than for luxury items. In 1954 France became the first country to adopt the value-added tax on a large scale. Though complex to calculate, the tax served as an improvement on earlier systems by which a product was taxed repeatedly at every stage of production and distribution. It has since been adopted throughout much of Europe and in many countries in South America, Asia, and Africa. All European Union member countries have a VAT. See also regressive tax.