What Are the Advantages and Disadvantages of a Value-Added Tax?

A value-added tax, or VAT, has the advantage of offering an efficient way to raise funds for government programs from a broad taxpayer base. Its primary disadvantage is the effect such costs ultimately have on the consumer. According to the New York Times, VATs are used in every developing country other than the United States.

The New York Times explains that the VAT is a consumption tax applied at every step from raw material to finished product. It is a type of sales tax which the government collects on goods, services and products on a nationwide basis. Although it is collected in stages, it has the disadvantage of affecting the final price of goods.

According to Bloomberg, an advantage of the VAT is that it encourages investment instead of spending. It also allows the government to increase funding without touching politically charged income tax deductions, such as those for mortgage interest or medical expenses.

Opponents of the VAT point to spiraling VATs in the European Union where some consumers pay over 20 percent on goods for this tax, according to Bloomberg. However, in Canada, the initial rate of 7 percent has dropped twice to a rate of 5 percent. European Union rules require members to charge a minimum of 15 percent.