Essay on Value Added Tax

The United States is currently digging its way out of the worst recession in recent history. Government spending and deficits have reached staggering highs while the current tax system has had both sides of the isle up in arms, and calling for reform. The US needs a means of generating enough revenue to begin to truly tackle its mounting deficit, while at the same time encouraging growth in the private sector and catering to a public still hurting from the economic downturn. The solution may lie within the value added tax.
The value added tax or VAT is a consumption based tax that is widely used throughout many industrialized nations. A VAT is categorized as a cascading tax, meaning that the tax is levied at each stage of production rather than just at the final sale to the consumer. The tax however is not on the full price at each stage, but on the value added by each intermediary. This mechanism creates two specific benefits; the tax burden is spread more evenly so that intermediaries are not taxed twice on input materials and output, and creates a self-policing supply chain. This tax can be illustrated through an example, for instance the production of a desk with a 10% sales tax and with a 10% VAT. With no tax system in place a manufacturer pays a lumber yard $100 for high grade wood to make a desk. The manufacturer then sells the desk to a retailer for $120, who then sells to a final consumer for $150+10% sales tax equaling $165 and the retailer pays the government $15. Using the VAT, the manufacturer pays $110 [$100+ ($100 x 10%)] to the lumberyard, which pays $10 to the government. The manufacturer then sells to the retailer for $132 [120+ (120x.10)], paying $2($12-10 from previous stage) to the government. The consumer is then charged $165 [150+ (150x.10)] for the final product and pays $3 ($15-12) to the government. This system of involving each