The idea of a value-added tax (VAT) has been tossed around since 1918. And some think it's the answer to the nation's budget deficits.
Michael Periu of EcoFin Media said a VAT is similar to a sales tax with two important differences. First, sales taxes are charged by state governments (and in some cases by municipalities) and only impact transactions that occur within that state. A VAT is charged by the federal government and impacts transactions anywhere in the country.
Second, sales taxes are due and collected on goods and services when they are consumed. The cup of coffee you purchase at the corner deli requires that you (the consumer) pay a sales tax. The deli did not pay a sales tax on the disposable cup or on the beans used to brew your coffee. The deli was just a “middle man” from a sales tax perspective and exempt from the sales tax. With a VAT, every company that touches a product or service on the path from raw material to finished good must pay a value-added tax. The mechanics are a bit tricky.
Read more about VATs and how they could impact business here.