7 A value-added tax (VAT) is a multi-stage, noncumulative tax on consumption, and it is levied at each stage of the production and distribution system. At the retail level, a retailer sends VAT payments to the government only on the value it adds to a particular product (i.e., its markup). The balance of the VAT on that product is remitted to the government by all other registered firms involved in the production of any inputs used in making or distributing that product. Each party’s responsibility is in proportion to its share in the total value added embodied in the final product. Because all the firms involved in the production and distribution will be fully reimbursed by means of successive VAT tax credits, consumers are the ones ultimately bearing the entire VAT liability.

Some US government officials and elected officials have advocated adoption of the European VAT system for revenue and balance of trade reasons. What is their reasoning? Do you agree with their position? Will VAT enhance US trade competitiveness? Will it discourage tax avoidance and evasion?