Sales Tax vs Value-Added Tax (VAT)
Sales Tax and Value-Added Tax (VAT) are two Public Finance & Taxation concepts in AP Economics that students often mix up. In short: sales tax is a sales tax is a tax on goods and services collected at the point of sale as a percentage of the price. Meanwhile, value-added tax (vat) is a VAT is a tax collected at each stage of production on the value added, ultimately paid by the final consumer. Here is how they compare side by side.
A sales tax is a tax on goods and services collected at the point of sale as a percentage of the price.
It is generally considered regressive because lower-income households spend a larger share of their income on taxed consumption. It is a major revenue source for U.S. state and local governments.
A VAT is a tax collected at each stage of production on the value added, ultimately paid by the final consumer.
Unlike a retail sales tax charged only at the final sale, a VAT is collected piece by piece along the supply chain. It is widely used outside the U.S. and is hard to evade.