10.2 General Sales Tax

A general sales tax serves as an alternative to income and other taxes to finance government operations. The broad base is one of the advantages because it allows for high revenue generation at a low tax rate. A general sales tax implicitly taxes wealth because wealthier people consume more. This can also promote economic growth by discouraging consumption and encouraging savings.

The collection of a general sales tax can take different forms. A retail sales tax is imposed only at the final stage of production or distribution. It is commonly used by U.S. state and local governments, as well as in Canadian provinces. On the other hand, the value-added tax (VAT) applies to every transaction along the production and distribution chain. Each purchaser, except for the final consumer, can claim a refund on the tax through credits. The VAT is a requirement for membership in the European Union and is also used in countries like China, Russia, and several in Latin America. A VAT tax is so-called self-enforcing (more details about this later), which leads to the ability to impose higher tax rates. For further details on why the VAT is considered administratively superior to a retail sales tax, a useful resource is available from the Tax Policy Center.