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A value-added tax (VAT) is a sales tax levied at every step in a production process. The VAT is collected when goods or services are purchased throughout the production process, from the initial purchase of raw materials to the sale of the final product at a retail outlet. In some countries VAT is known as “goods and services” tax (GST).

Consumption versus Saving

Individuals can do two things with their income: They can consume (spend) it, or they can save it. In an income-based tax system, both consumption and savings are taxed; in a consumption-based tax system, only consumption (income minus savings) is taxed. Consumption taxes are very popular with governments around the globe; the United States is the only developed nation without a broad-based consumption tax ...

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