A value-added tax (VAT) is a consumption tax assessed on the value added at each production stage of a good or service. Unlike tariffs, VAT allows businesses along the value chain to receive a tax credit for the VAT already paid, but the end consumer does not. This makes it a tax on final consumption.
In contrast to sales taxes, which are collected by retailers at the point of final consumption, VAT requires each business in the production chain to pay VAT on the added value of goods or services at each stage. The VAT due is calculated by multiplying taxable sales' value by the tax rate and crediting previously paid VAT. Sales taxes can increase costs for businesses as they often apply to business inputs that may also be consumer goods.
The worldwide average VAT rate is about 15 percent, with regional averages ranging from 12 percent in Asia to 20 percent in Europe. The United States differs from other major countries by levying state and local sales taxes instead of a nationwide VAT, with an average rate of 6.6 percent in 2024.
While some countries implement reduced rates and exemptions for certain goods and services to promote equity and encourage specific consumption patterns, an Organisation for Economic Co-operation and Development (OECD) study found these measures are often ineffective in achieving policy goals and can be regressive. A regressive tax places a higher burden on low-income taxpayers compared to middle- and high-income taxpayers. The OECD suggests measures directly aimed at increasing poorer households' real incomes as more effective solutions.
VAT revenue represents a significant portion of total tax revenues in countries that levy this tax, accounting for almost 22 percent of total tax revenue among OECD countries with a VAT in 2022.
