Ok, I'm going to need some of your more taxation-minded folks to help me out with this. Why exactly is VAT used in so many areas? It seems to be a less efficient form of tax collection as it requires more auditors and more paperwork. Why would governments do this? To be sure I'm understanding this right, I'm going to draw out a hypothetical product: Widget. Widget is a device that has 3 inputs: supplier of raw materials, producer, and retailer. The supplier sells a total of $1 worth of material per widget. VAT at 10% would require the supplier to pay 10 cents on this sold product. Since the supplier doesn't want to lose money, he will sell the raw materials at $1.10 and indicate that 10 cents went towards VAT when he sells it to the producer. The producer adds labor and expertise to the raw materials and sells the finished good to a retailer for $5. Because the total value added is $4 (5-1), the producer notes this on his tax records and charges the retailer $5.50 (10% VAT). The retailer determines that the widget must be sold at $10. The retailer is sure to note that it expended 50 cents towards VAT, and that it is adding an additional $5 to the value of the product. Thus, when the consumer comes along to buy the product, he will have to pay $11 for the widget including VAT. With a flat 10% sales tax, the consumer would pay the exact same amount in taxes, and the government would collect the exact same amount. However, with VAT, more auditors and accountants are needed. Most products require dozens of suppliers and producers; the process is undoubtedly much more time consuming than the one shown here. So, why would a government choose VAT over traditional sales tax? I'd really like to hear an explanation, because I'm sure I'm missing something obvious.