What’s the Best Way to Tax Consumers? VAT vs. Sales vs. GRT

A value-added tax is a tax on each step of the supply chain.

For example, if America had a 20% VAT then if you bought iron ore for $60 then how much would you have paid in VAT?

$10.

And then if you turned your iron ore into a bicycle and sold it to a bicycle shop for $120 then how much would you have collected in VAT?

$20.

Once you send your $20 to the government you’d then get back the $10 you paid in VAT so that in the end the final consumer would pay the full 20% VAT ($40) since they don’t get reimbursed.

I simplified the concept as best I could, but even still the VAT is quite complex, especially when you consider that some countries only reimburse part of it on some goods on some steps of the supply chain.

The value-added tax’s complexity is one of the reasons why I prefer a sales tax.

A sales tax just taxes the last step directly!