Differences in how the VAT is administered can affect its budgetary effects. A VAT applies to the difference between the value of all taxable sales and the sum of all taxable purchases. Under the subtraction method, the tax is calculated using information about a business's total activity. A business remits the VAT collected on the total value of its sales of a particular good or service and claims a credit for the taxes paid on the purchased inputs. Under the credit-invoice method, the tax is calculated for each transaction. There are two primary ways to implement a VAT: the credit-invoice method and the subtraction method. Many countries impose those lower rates to promote equity, but lower VAT rates can also be applied to encourage consumption of goods and services considered to have a social benefit, including books and cultural and entertainment services, or to stimulate employment in specific economic sectors like hospitality and tourism. That subset of goods and services generally includes those that represent a larger share of total consumption for households with lower income, such as food and public transportation services. Although a standard rate usually applies to most goods or services, some are taxed at lower rates. As a result, the value of those purchased inputs remains subject to the VAT. By contrast, if a purchased item is exempted, the seller cannot claim a credit for the VAT paid on inputs purchased to produce that item. If a purchased item is zero-rated, the seller can claim a tax credit for the VAT that is paid on the purchased inputs-such as materials and equipment-used to produce the good or provide the service. Goods and services excluded from the VAT can be either "zero-rated" (that is, taxed at a rate of zero percent) or exempt from the VAT. In addition, because a VAT is designed to tax domestic consumption, goods and services produced domestically and exported to other countries are generally excluded from the tax by contrast, goods and services produced abroad and imported from other countries are generally subject to it. Most countries exclude certain categories of goods and services from a VAT, either because they serve a social interest (such as education and health services) or because their value added is difficult to measure (as with financial services). A VAT generally does not apply to all purchases of goods and services. Whether to exempt small businesses from the tax.Whether to apply a uniform VAT rate or different rates to different sets of goods and services,.Because a VAT is the most common form of broad consumption-based tax, this option focuses on approaches to reduing the deficit by imposing a consumption tax in the form of a VAT. In 2020, the average standard VAT rate for OECD countries was 19.3 percent, ranging from 4.5 percent in Andorra to 27 percent in Hungary. By contrast, more than 160 countries-including all members of the Organisation for Economic Co-operation and Development (OECD) other than the United States-have adopted broad-based VATs. In addition, most states impose a retail sales tax on many goods and services. The United States does not currently have a broad consumption-based tax at the federal level, although it does impose federal excise taxes on purchases of several types of goods and services, including gasoline, air travel, alcohol, and cigarettes. An excise tax, unlike a VAT or a retail sales tax, is generally levied on a smaller set of goods and services and is usually assessed on each unit purchased rather than on the value of the purchase. Like a VAT, a retail sales tax is a form of consumption tax collected on the purchase of goods and services, but it is only collected when a consumer purchases the final product. For example, a retailer would pay a VAT on the difference between the value of goods it sold to consumers and the value of those goods when it purchased them from manufacturers the manufacturers would pay a VAT on the difference between the value of the materials used to produce a good and the value of the finished good it sold to retailers. A VAT is a type of consumption tax levied on the incremental increase in the value of a good or service that occurs at each stage of the supply chain until the final point of sale. There are different forms of such taxes, including value-added taxes (VATs), retail sales taxes, and excise taxes. A consumption tax generally applies to spending on goods and services.
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