A common trend by many governments has been to introduce a Value Added Tax to replace a Sales Tax (as evidenced by the multitude of HST related questions on this site). How do these types of taxes differ? Are they better for business? Does the government get more or less from each system? Is one system worse for the consumer?
Sales taxes are charged at the point of purchase, while a VAT is assessed during the production process of the item. In the end, the amount paid by the consumer is the same, but with the VAT, the tax was collected from the manufacturer, instead of the consumer.
One of the big arguments for VAT is that it prevents lost revenue due to things like smuggling (if sales tax increases past 10% smuggling spikes, so the VAT is a good mechanism if you're looking to implement large taxes on goods). It also keeps the tax burden away from shippers and other tiers of the production process that don't change the intrinsic value of the item.
1It also means a lot more paperwork for more business (which is a measurable drag on the economy) and is prone to arbitrage as people game the system (putting VAT liabilities into shell companies that conveniently go bankrupt). Also, it tends to hide the magnitude of the tax burden from the consumer, unlike a sales tax, and this renders high taxes politically expedient. (This is bad insofar as you accept the position that high taxes damage the economy in excess of the goals that the government uses them to achieve).– user296Jun 30, 2010 at 18:27
2I'm not convinced that it's fundamental to VAT that it hides the tax burden from the consumer. In the UK, businesses that market primarily to other businesses are allowed to quote prices ex-VAT, whereas businesses that market primarily to consumers are forced to quote prices inc-VAT. Contrast that with the US where sales tax is typically implicit and added at the till. I think it's this difference of consumer legislation that leads to the different visibilities. Jul 1, 2010 at 20:49
@GaneshSittampalam How does a consumer then learn of the price minus VAT if businesses that sell to consumers can only see price with VAT? Its not like consumers typically buy as a business.– AndyAug 15, 2017 at 0:12
@Andy they either know the rate and mentally subtract it, or they don't think about it. But it's orthogonal to whether it's VAT or sales tax : either way, it's logically possible to quote prices with or without the tax, but the law or local custom might mandate one or the other. Aug 16, 2017 at 5:29
@Andy Note that it isn't shown on, e.g., supermarket shelves but in the EU pre-tax total price and VAT are itemized on every bill or receipt you get, by law.– RelaxedSep 20, 2019 at 22:14