Here in the U.S., we mostly think of taxes in terms of what we earn. The federal government, usually your state, and sometimes even your city take a percentage of your earnings to finance their operations. But what if we were taxed less on what we earn and more on what we consume? That’s the basic idea behind the value-added tax, or VAT, which is a type of consumption tax currently in place in more than 140 countries around the world, including every major Western country except the United States.
But some of you may be asking yourselves if we already taxed on consumption. In short, yes. Average sales tax in the United States is nearly 10 percent and like a VAT, sales tax is certainly a consumption tax. But here’s the difference: unlike sales tax, which only applies to the final retail transaction with the consumer, a typical VAT taxes each stage of production, while giving a credit for taxes already paid.
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