Value-added tax, often shortened to VAT, is a common tax system present in much of the world. Roughly 170 nations have adopted a value-added tax system. However, the United States is not one of the nations to have made this adoption.
In fact, there’s little hint that the United States will ever adopt such a system. If you are looking into the advantages and disadvantages of VAT, we’re here to help. Read on for some vital information on VAT and some reasons why the United States hasn’t adopted the system.
What Is Value-Added Tax?
Value-added tax is difficult to understand on the surface, but actually quite simple. In the simplest terms possible, value-added tax is tax being added to a product or good in relation to its total value.
To get more technical, VAT adds to the gross margin of a good at every point of manufacturing, distributing, and selling. Companies calculate and add this tax at each stage and collect as they go. The tax that the consumer pays relates to this tax, plus the final value tax.
Can You Reclaim VAT?
One key point is that VAT is paid by a country’s residents, not visitors. Because of this, the majority of VAT-using nations have ways to reclaim VAT.
For a value-added tax example, a non-EU company can reclaim VAT on employee expenses in the Union. If an employee is doing business there, they can reclaim business travel, exports, supplier invoices, and so on. This only includes the tax on these items and not their full cost.
Why Doesn’t the US Have Value-Added Tax?
This is a bit more complicated and has to do heavily with politics. One of the many reasons is that some believe it punishes the poor.
This is because businesses are paying more tax. In a sales price tax, the consumer is paying the tax to the government. VAT means businesses are paying portions along the way as well.
In doing so, prices rise considerably for businesses. Passing these costs along to the consumer also increases the products of goods. It makes many things much more expensive, which is punishing for low-income consumers.
Some also feel that it encourages tax evasion for businesses. That said, proponents of the policy insist that it provides an incentive to earn more money. It also can close tax loopholes, raise government funds, and is easier to track.
There are plenty of reasons both for and against. Some nations, like the United Kingdom, actually have both sales price and value-added taxes. Such a system has been considered for the United States as well.
Value-Added Tax Systems
Implementing a new tax system in the United States would take years to acclimate. It’s difficult to fully restructure an economy, which serves as a strong barrier for the United States. Other nations like the United Kingdom are prime examples of the impacts of a value-added tax.
If you have further questions or concerns, feel free to contact us for more information.