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A VAT is functionally equivalent (in theory) to a retail sales tax, or at least that is the way VAT's operate in most of the developed world. Producers get a credit for the VAT paid at earlier levels of production/distribution. The only step where there is no credit is the final sale to the non-business consumer, who pays the entire tax at point of sale.
The advantages of a VAT to the RST are administrative, and historical. The credit makes it easier to enforce a VAT - there is no advantage to an upstream buyer for downstream producers to evade the VAT because evasion reduces the credit available. Also, the RST has traditionally excluded most services, but the VAT taxes 'value added' which would effectively include all services in the tax base. So the base is broader and enforcement arguably easier, which allows for a lower rate to collect the same revenue
Two big advantages to a VAT over RST - businesses pay a lot of RST, maybe 40%, depending on the estimate, and exported goods include that imbedded RST in the cost, raising the after tax cost for U.S. made goods. With a VAT, 100% of the tax paid during U.S. production can be rebated at the border and goods exported free of VAT, which should increase the competitiveness of U.S. made goods relative to current law. And VAT is fully assessed on all imports.
VAT's are a bad idea. They lend to inflation, and hit the poor the hardest.
PORT WASHINGTON, N.Y. (MarketWatch) -- The last thing this economy needs is a value-added tax.
Let's call a spade a spade. A value-added tax or VAT is a sales tax in disguise.
It is not a painless way of raising revenue as some would have you believe.
If anything, a VAT is a painful approach to generating the funds the government needs because of a number of reasons.
First, like any sales tax, it hits the poor much harder than it does the rich. This is because everyone pays the same percentage tax, but since the poor spend all of their income and then some, their overall tax burden will be higher with a VAT than those who are wealthy and thus don't spend all that they earn.
Furthermore, in case you haven't thought of it, the imposition of a VAT would have the practical effect of reversing our progressive tax structure -- the holy grail of Democratic administrations since the federal income tax was enacted nearly a century ago.
Don't fall into the VAT - MarketWatch