History

• In America, consumption taxes on certain products, such as liquor and tobacco, were common sources of revenue for the federal and state governments. It was not until 1921 that West Virginia passed the first sales tax law in the country. The value added tax began with France in the 1950s, and Britain adopted this method of expenditure taxation in 1973. As of 2010, almost all members of the European Union use value added taxes to collect government revenue.
  
  

Purpose

• At the state level in America, an expenditure tax on the purchase on every item funds roads, schools and social programs. In Europe, politicians use the value added tax to fund the functions of their federal governments. The goal of an expenditure tax is to reduce spending on frivolous items by encouraging saving. Higher taxes on goods cause individuals to save their money instead of spending it.
  
  

Types

• In the U.S., sales taxes are collected by retailers, at a fixed percentage, and these funds are remitted to the state treasury on a biweekly or monthly basis. Delaware, Alaska, New Hampshire, Oregon and Montana feature no sales taxes. Consumption taxes in America can range from 0 to 8.25 percent. In Europe, manufacturers pay a set percentage to the government, at each stage of the production process. Items fall under three categories, which include regular rate, reduced rate and zero rate. Usually food, books and medical care, among other necessary goods and services, fall under reduced or zero rate, and regular value added rates vary, hitting 17.5 percent in the United Kingdom.
  
  

Benefits

• Sales taxes go directly to many necessary functions of state and local governments. Value added taxes mostly benefit manufacturers and big business. For example, making a television is a multistep process. Components are usually manufactured by different companies, but taxes are charged every time the component changes hands. By offering lower taxes on business material purchases, the taxation of production is lowered.
  
  

Drawbacks

• Expenditure taxes are usually considered regressive, because the middle class and poor spend a larger percentage of income on the basics of life, such as food, shelter and energy. The rich, living off of stock and bond returns, will pay a lower tax load. European states usually combine value added with income taxes, which further depresses incomes. In addition, the value added tax system contains a number of loopholes for manufacturers.