How Taxing Consumption Is Better Than Taxing Income Essay

813 Words Sep 18th, 2014 4 Pages
Gregory Mankiw said in his article, Much to Love, and Hate, in a VAT, that the American tax system is clearly inefficient and inhibits the economy’s ability to reach its full potential. Taxing consumption is better than taxing income, and a value-added tax does exactly that. The value added tax system (VAT) is a form of consumption tax. In short the VAT is attached to each stage of a product’s sale price. Thus, when a product or service is acquired a value tax is added to the transaction. The value added tax system obtains its revenue from the sale of goods and services minus any of the costs of materials used in the production that have already been taxed. For example, when a European manufacturer builds a car they are taxed on all of the supplies purchased for the production of the car. Once a consumer purchases the vehicle, he or she must pay the value-added tax that applies. There are a variety of companies that are involved in the creation of the parts used to build the car, which are all taxed. Additionally, the value added tax has an invoiced based collection method. With this method every seller applies the value added tax rate onto their product or service. This passes it on to the buyer with a special invoice that specifies the amount of added tax. However, the value added tax cannot be issued to a buyer that purchases his or her own goods. This scenario is referred to as a tax output. If this is the case the seller will receive a credit in the form of a…

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