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The EU and some other countries impose a “value added tax” (VAT) on goods purchased by consumers. The “value added” to a product is the cost of the materials and other items necessary to prepare it for sale to a consumer. Value added taxes are imposed at all points in the creation of goods, through the entire manufacturing process to the point of sale. The purchase receipt issued to a consumer reflects these costs. There is not a separate VAT receipt for value added tax, but the VAT is included in the sale price and sometimes indicated separately on the sales receipt.
The amount of value added tax that a consumer pays is the cost of the product, minus the cost of supplies and materials purchased to make the product that have already been taxed. A table-maker, for example, is charged a VAT on all the materials and supplies she purchases to make the table. At the point of sale, the consumer must pay the VAT amount applicable to her. Value added taxes are a fixed percentage of the sale price and vary from country to country.
At sale, a product’s sale price is multiplied by a government set VAT rate. The resulting amount is the consumer’s value added tax. This tax plus the sale price is the gross price, which the consumer pays to buy the product. Some merchants include the VAT in the sale price and it is not an element of the sales receipt. Others issue receipts containing a VAT receipt summary, which lists the amount of the tax separately from the sale price and the gross price.
Each country in the EU has its own valued added tax rate, and VAT rates change periodically. The UK, for instance, has three different VAT rates. The standard rate, which applies to services and goods bought from any VAT-registered business, increased after 3 January 2011 to 20 percent. The reduced rate, applied to such things as utility services and safety seats for children is currently fixed at five percent. There is a zero VAT rate, included in VAT receipt summaries, for most food items, reading materials, equipment for disabled people, and clothing for children.
The EU and most industrialized nations use value added taxes. Some US economic analysts advocate the adoption of a value added tax in America to help balance the budget. Critics argue that value added taxes dramatically increase the cost of goods and would burden poorer people more than it would help the economy.
Others critics argue that a weakness of the value added tax is that it is “hidden” in the sale price. The VAT is fixed at a certain percentage. The ultimate consumer has no way to determine the fairness or accuracy of the “value added” along the production chain in comparison to the fixed government rate. The VAT receipt summary cannot reflect this.