Virtually all developed countries and many developing countries have a value added tax, commonly known as a VAT. The United States is a prominent exception. The VAT is essentially a sales tax that is levied on each stage of production. Firms pay the VAT on their sales and then receive a credit for VAT paid on their purchases. Unlike a sales tax, the VAT is embedded in the price of goods. It is rebated when goods are exported but imports are required to pay the VAT. Rates on the VAT can be high for example; the basic rate in the United Kingdom is 17.5 percent.
The VAT has some important advantages. It is relatively easy to collect and, as a consumption tax, does not penalize savings. There are some potential difficulties. Since U.S. states already levy retail sales taxes, incorporating a VAT at the state level could be difficult and be seen to impinge on state taxing authority. In addition, some conservatives worry that it is too efficient and consumers will not notice all the taxes they pay. Liberals worry that the VAT, like all consumption taxes, could be regressive. An old joke goes that the time will come for the VAT when liberals recognize it is a money machine and conservatives recognize it is regressive.