By Dave Carpenter, AP Personal Finance Writer
It's popular around the world. You probably paid it on your last European vacation. But how many Americans understand or even know about the value-added tax?
The answer at the moment is surely "not too many." That will change dramatically, however, if the Obama administration ever puts it forward as a serious option for generating badly needed revenue.
Former Federal Reserve Chairman Alan Greenspan said earlier this month that he believed the government will eventually impose some kind of value-added tax, or VAT. While that's far from certain or imminent, the VAT debate is starting to intensify.
Here are some questions and answers about the value-added tax.
Q: What exactly is a value-added tax?
A: It's essentially a national sales tax, although technically not quite the same. It's a tax assessed on the transfer of goods and services, from production to delivery. Consumers are not taxed directly but the higher costs are passed along to them, which means they bear the burden for higher prices.
Q: How does it work?A: In the kind of value-added tax that's in place in Europe and is being looked at in Washington, a tax is levied on the value added to a product at every stage of the manufacturing cycle. It's collected from each party in the production chain — manufacturer, wholesaler, retailer. Each pays taxes on the amount by which its gross receipts exceed what it paid for the product.
While that may sound complicated, even opponents acknowledge that it is a relatively easy tax to enforce, administer, comply with and raise revenue from. Since transactions must be recorded, the tax is hard to evade, too.
Q: Where is it already in use?
A: More than 130 nations have a value-added tax of some sort, with rates ranging from approximately 4% to at least 25%. It is particularly common in the European Union, where countries use it to pay for national health insurance.
Q: Why are we hearing about it now?
A: The change in administrations and the growing need for money have brought VAT into the tax reform debate.
The government is spending much more than it's taking in even without taking into account the proposed expansion of the health care system, putting pressure on Congress to come up with a new source of revenue.